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Real Estate and Retail Space Management

This book is a part of the course by Jaipur National University, Jaipur.This book contains the course content for Real Estate and Retail Space Management.

JNU, JaipurFirst Edition 2013

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Index

ContentI. ...................................................................... II

List of FiguresII. ..........................................................VI

List of TablesIII. ......................................................... VII

AbbreviationsIV. ....................................................... VII

Case StudyV. ...............................................................111

BibliographyVI. ......................................................... 117

Self Assessment AnswersVII. ................................... 120

Book at a Glance

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Contents

Chapter I ....................................................................................................................................................... 1Real Estate ................................................................................................................................................... 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 Introduction .............................................................................................................................................. 21.2 Real Estate Business ............................................................................................................................... 21.3 Types of Ownership Interests ................................................................................................................... 21.4 Participants of Real Estate Market ........................................................................................................... 21.5 Types of Real Estate ................................................................................................................................. 31.6 Rental Trends in India ............................................................................................................................. 41.7 Features of Real Estate Markets .............................................................................................................. 51.8 Fundamental Factors Determining the Value of Real Estate .................................................................. 51.9 Indian Brand Equity Foundation Industry Updates: Real estate .............................................................. 6Summary ....................................................................................................................................................... 8References ..................................................................................................................................................... 8Recommended Reading ............................................................................................................................... 9Self Assessment ........................................................................................................................................... 10

Chapter II ..................................................................................................................................................... 12Prospects and Problems of Real Estate in India ........................................................................................... 12Aim .............................................................................................................................................................. 12Objectives .................................................................................................................................................... 12Learning outcome ........................................................................................................................................ 122.1 Characteristic of Real Estate Market in India ........................................................................................ 132.2 Reasons for Present Real Estate Boom .................................................................................................. 132.2 Price Variations in India ........................................................................................................................ 152.3 Constraints in the Real Estate Investment ............................................................................................ 162.4 Indian Scenario ...................................................................................................................................... 172.6 Retail Real Estate ................................................................................................................................... 18Summary ..................................................................................................................................................... 21References ................................................................................................................................................... 21Recommended Reading ............................................................................................................................. 22Self Assessment ........................................................................................................................................... 23

Chapter III .................................................................................................................................................. 25Unorganised vs. Organised Retail in India .............................................................................................. 25Aim .............................................................................................................................................................. 25Objectives .................................................................................................................................................... 25Learning outcome ........................................................................................................................................ 253.1 Retail ............................................................................................................................................. 263.2 Retailing in India .................................................................................................................................... 263.3 Organised vs. Unorganised Sectors ....................................................................................................... 263.4 Unorganised Retail in India ................................................................................................................... 273.5 Organised Retail in India ...................................................................................................................... 29Summary ..................................................................................................................................................... 32References ................................................................................................................................................... 32Recommended Reading ............................................................................................................................. 32Self Assessment ........................................................................................................................................... 33

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Chapter IV .................................................................................................................................................. 35Multi-channel Retailing ............................................................................................................................. 35Aim .............................................................................................................................................................. 35Objectives .................................................................................................................................................... 35Learning outcome ........................................................................................................................................ 354.1 Retail Channel ........................................................................................................................................ 364.2 Internet Channel ..................................................................................................................................... 364.3 Catalogue Channel ................................................................................................................................. 374.4 Direct Selling ......................................................................................................................................... 374.5 Television Home Shopping .................................................................................................................... 374.6 Benefits Offered by the Retail Channels................................................................................................ 38 4.6.1 Store Channel ......................................................................................................................... 38 4.6.2 Catalogue Channel ................................................................................................................. 38 4.6.3 Internet Channel ..................................................................................................................... 394.7 Benefits of Multichannel Retailing ........................................................................................................ 404.8 Overcoming the Limitations of an Existing Format .............................................................................. 404.9 Increasing Customer Satisfaction and Loyalty ...................................................................................... 414.10 Gaining Insights into Consumer Shopping Behavior .......................................................................... 414.11 Expanding Market Presence ................................................................................................................. 414.12 Building a Strategic Advantage ........................................................................................................... 41Summary ..................................................................................................................................................... 42References ................................................................................................................................................... 42Recommended Reading ............................................................................................................................. 43Self Assessment ........................................................................................................................................... 44

Chapter V .................................................................................................................................................... 46Retail Design ............................................................................................................................................... 46Aim .............................................................................................................................................................. 46Objectives .................................................................................................................................................... 46Learning outcome ........................................................................................................................................ 465.1 Introduction ............................................................................................................................................ 475.2 Outlet Design ......................................................................................................................................... 475.3 Formulating a Store Design ................................................................................................................... 475.4 Materials ............................................................................................................................................. 475.5 Signage ............................................................................................................................................. 485.6 Store Design and the Corporate Image .................................................................................................. 495.7 The Exterior Design ............................................................................................................................... 495.8 Considerations for Merchandise Locations ........................................................................................... 505.9 Location of Merchandise within a Category: The Use of Planograms .................................................. 51Summary ..................................................................................................................................................... 53References ................................................................................................................................................... 54Recommended Reading ............................................................................................................................. 54Self Assessment ........................................................................................................................................... 55

Chapter VI .................................................................................................................................................. 57Category Management .............................................................................................................................. 57Aim .............................................................................................................................................................. 57Objectives .................................................................................................................................................... 57Learning outcome ........................................................................................................................................ 576.1 Category Management ........................................................................................................................... 586.2 Category Management and Efficient Consumer Response (ECR) ........................................................ 596.3 Category Captain ................................................................................................................................... 626.4 Category Management Process .............................................................................................................. 62 6.4.1 Definition of a Category ........................................................................................................ 63 6.4.2 The Strategic Role of the Category ........................................................................................ 64

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6.4.3 The Role of the Category within the Retailer’s Total Assortment ......................................... 64 6.4.4 Establish the Performance Measures for the Category .......................................................... 64 6.4.5 Formulate a Strategy for the Category ................................................................................... 65 6.4.6 The Category Mix .................................................................................................................. 65 6.4.7 Plan Implementation ............................................................................................................. 65 6.5 Space Planning .......................................................................................................................... 66Summary ..................................................................................................................................................... 72References ................................................................................................................................................... 73Recommended Reading ............................................................................................................................. 73Self Assessment ........................................................................................................................................... 74

Chapter VII ................................................................................................................................................ 76Allocating Retail Space to Products ......................................................................................................... 76Aim .............................................................................................................................................................. 76Objectives .................................................................................................................................................... 76Learning outcome ........................................................................................................................................ 767.1 Introduction ............................................................................................................................................ 777.2 Space Management ................................................................................................................................ 777.3 The Space Management Process ............................................................................................................ 77 7.3.1 Measuring Retail Space ......................................................................................................... 79 7.3.2 Dividing The Space Into Selling Areas .................................................................................. 79 7.3.3 Determining The Layout And Deciding On Product Adjacencies ......................................... 80 7.3.4 Allocating Space To Individual Products ............................................................................... 827.4 Practical and Customer Considerations ................................................................................................. 857.5 Space Allocation Systems ...................................................................................................................... 867.5 Space Allocation and Category Management ........................................................................................ 877.6 Store Grading ......................................................................................................................................... 887.7 Micro-Merchandising ............................................................................................................................ 88Summary ..................................................................................................................................................... 89References ................................................................................................................................................... 90Recommended Reading ............................................................................................................................. 90Self Assessment ........................................................................................................................................... 91

Chapter VIII ............................................................................................................................................... 93Visual Merchandising ............................................................................................................................... 93Aim .............................................................................................................................................................. 93Objectives .................................................................................................................................................... 93Learning outcome ........................................................................................................................................ 938.1 Introduction ............................................................................................................................................ 948.2 The Scope of Visual Merchandising ...................................................................................................... 948.3 Visual Merchandising Planning Systems ............................................................................................... 948.4 Responsibility for Visual Merchandising within the Retail Structure ................................................... 948.5 Visual Merchandising as a Support for a Positioning Strategy .............................................................. 958.6 Fixtures and Fittings .............................................................................................................................. 958.7 Product Presentation ............................................................................................................................ 1008.8 Store layout .......................................................................................................................................... 1008.9 Displays ........................................................................................................................................... 1038.10 Window Displays ............................................................................................................................... 105Summary ................................................................................................................................................... 107References ................................................................................................................................................. 107Recommended Reading ........................................................................................................................... 108Self Assessment ......................................................................................................................................... 109

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List of Figures

Fig. 2.1 Cause-effect scenario leading to emergence of organised real estate market in India ................... 13Fig. 2.2 FDI in Indian real estate ................................................................................................................. 14Fig. 2.4 Per Capita Income .......................................................................................................................... 15Fig. 2.5 GDP 16Fig. 2.7 Barriers in GDP .............................................................................................................................. 18Fig. 2.8 Growth of retail industry ................................................................................................................ 19Fig. 4.1 Retail infrastructure: Store based, traditional non-store and ‘e-retail’ ........................................... 36Fig. 5.1 The open entrance to a John Lewis store ........................................................................................ 50Fig. 5.2 Percentage of shoppers visiting different areas of the store ........................................................... 51Fig. 6.1 Category management .................................................................................................................... 58Fig. 6.2 Required infrastructure ................................................................................................................... 59Fig. 6.3 ECR factors and relationship .......................................................................................................... 61Fig. 6.4 Category management process ....................................................................................................... 62Fig. 6.5 Product groups or categories .......................................................................................................... 66Fig. 6.7 Assortment plan .............................................................................................................................. 68Fig. 6.8 Assortment planning ....................................................................................................................... 68Fig. 6.9 Benchmarking ................................................................................................................................. 69Fig. 6.12 Pricing strategy ............................................................................................................................. 71Fig. 7.1 Space management process ............................................................................................................ 78Fig. 7.2 Measuring retail space using square metres ................................................................................... 79Fig. 7.3 Using linear measurement for retail space ..................................................................................... 80Fig. 7.5 Typical ‘hotspots’ in a retail store ................................................................................................... 82Fig. 7.6 Space allocation alternatives .......................................................................................................... 85Fig 8.1 Visual merchandising: Local and centralised approaches ............................................................... 95Fig. 8.3 Gondolas ......................................................................................................................................... 96Fig. 8.5 A four-way fixture........................................................................................................................... 98Fig. 8.6 Displays using tables and baskets ................................................................................................... 99Fig. 8.7 Fixture with integral lighting .......................................................................................................... 99Fig. 8.8 Grid store layout ........................................................................................................................... 101Fig. 8.11 Off-shelf display ......................................................................................................................... 104Fig. 8.12 Themed display ........................................................................................................................... 104

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List of Tables

Table 2.1 Inflation rate in India .................................................................................................................... 18Table 2.2 Absorption of organised retail space, total absorption ~ 19 million sq. ft. (2006-07) ................. 19Table 3.1 Major formats of in-store retailing ............................................................................................... 31Table 4.1 Non-store formats used in retailing .............................................................................................. 36Table 7.1 Product groups in a baby equipment retailer................................................................................ 81Table 7.2 Comparing alternative approaches to allocating space according to sales .................................. 83

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Abbreviations

CRU - Commercial Retail UnitBPO - Business Process OutsourcingGDP - Gross Domestic ProductCAGR - Compound Annual Growth RateFDI - Foreign Direct InvestmentSEZ - Special Economic ZonesICRA - Investment Information and Credit Rating Agency IPO - Initial Public OfferingIDFC - Infrastructure Development Finance CompanyCBDT - Central Board of Direct TaxedPCI - Per Capita IncomeULCRA - Urban Land Ceiling Regulation ActEMI - Equated Monthly InstalmentsUSD - United States DollarNCR - National Capital RegionGDRI - Global Retail Development IndexVAT - Value Added TaxECR - EfficientConsumerResponsePOS - Point of SalesCRP - Continuous Replenishment ProgramCM - Category ManagementEDI - Electronic Data InterchangeCAO - Computer-Aided OrderingABC - Activity-Based CostingSKU - Stock Keeping Unit

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Chapter I

Real Estate

Aim

The aim of this chapter is to:

definerealestate•

enumerate the kinds of real estate businesses •

enlist the types of ownership interests•

Objectives

The objectives of this chapter are to:

enumerate the main participants in the real estate markets•

describe the types of real estate•

elucidate the non-income-producing real estate•

Learning outcome

At the end of this chapter, you will be able to:

list the features of real estate markets•

describe the fundamental factors determining the value of real estate •

describe the government initiatives for real estate•


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1.1 IntroductionRealestateorimmovablepropertyisalegaltermthatencompasseslandalongwithanythingpermanentlyaffixedtothe land (such as buildings). Real estate is often synonymous with real property (also called reality), in contrast with personalproperty(alsocalledpersonality).However,technicallyspeaking,realestatereferstothelandandfixturesthemselves and real property are used primarily in over real estate. The term real estate and real property are used primarily in common law, while civil law jurisdiction refers instead to immovable property. In law, the word real means relating to a thing as distinguished from a person. Thus, the law broadly distinguishes between real property (landandanythingaffixedtoit)andpersonalproperty(forexample,clothing,furniture,money).

Themostbasicdefinitionrealestateis‘aninterestinland’.Broadly,theword‘interest’canmeaneitheranownershipinterest (fee-simple interest) or a leasehold interest. In an ownership interest, the investor is entitled to the full rights of ownership of the land (for example, to legally use and transfer the title of the land/property), and must also assume the risks and responsibilities of a landowner (for example, any losses as a result of natural disasters and the obligation to pay property taxes). On the other side of the relationship, a leasehold interest only exists when a landowner agrees to pass some of his rights on to a tenant in exchange for a payment of rent. If you rent an apartment, you have a leasehold interest in real estate. If you own a home, you have an ownership interest in that home.

1.2 Real Estate Business With the development of private property ownership, real estate has become a major area of business. Purchasing realestaterequiresasignificantinvestmentandeachparceloflandhasuniquecharacteristic.Sorealestateindustryhasevolvedintoseveraldistinctfields.Somekindofrealestatebusinessesinclude:

Appraisal:• Professional valuation services Brokerage: • Assisting buyers and sellers in transactions Development:• Improving land for use by adding or replacing buildings Property management:• Managing a property for its owner(s) Real estate marketing: • Managing the sale side of the property business Relocation services:• Relocatingpeopleorbusinesstodifficultcountry

1.3 Types of Ownership InterestsReal property (immovable property) can refer to the real estate itself or to various types of ownership interests in real estate, including:

Freehold:• Provides the owner the right to use the real estate for any lawful purpose and sell when and to whom the owner wishes. Life estate:• An interest in real estate, which is granted to a life tenant until that person dies. The interest terminates upon the death of the life tenant. Estate for years:• Similartolifeestatebuttermareaspecifiednumberofyears.Leasehold:• The right to posses and use real estate pursuant to the terms of a use. Reversion:• The right to posses the free interest in real estate after the expiration of a life estate, estate for years or leasehold. Concurrent or co-tenancy:• The ownership of an interest in real property by more than one party. Rights of any single party may be limited in various ways depending on the jurisdiction and type of concurrency.

1.4 Participants of Real Estate MarketThe main participants in the real estate markets are:

Owner/User:• These people are both owners and tenants. They purchase houses or commercial property as an investment and also to live in or utilise as a business. Owner: • These people are pure investors. They do not consume but rent out or lease the property to someone else.

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Renter:• These people are pure consumers. Developers:• These people prepare raw land for building, which results in new product or the market. Renovators:• These people supply refurbished buildings to the market. Facilitators:• This includes banks, real estate grocers, lawyers and others that facilitate the purchase and sale of real estate.

1.5 Types of Real EstateReal estate can be divided broadly into two categories. These are:

Income-producing real estates•Non-income-producing real estates•

Income-producing real estatesTherearefourbroadtypesofincome-producingrealestate:offices,retail,industrialandleasedresidential.Thereare other less common types as well, such as hotels, mini-storage, parking lots and seniors care housing. The key criteria in these investments is that they are income producing.

OfficepropertyOfficesarethe‘flagship’investmentformanyrealestateowners.Theytendtobe,onaverage,thelargestandhighestprofilepropertytypebecauseoftheirtypicallocationindowntowncoresandsprawlingsuburbanofficeparks.Atitsmostprimarylevel,thedemandforofficespaceistiedtocompanies’requirementforofficeworkers,andtheaveragespaceperofficeworker.Thetypicalofficeworkerisinvolvedinthingssuchasfinance,accounting,insurance,realestate,services,managementandadministration.Asthesejobsgrow,thereisgreaterdemandforofficespaces.

Returns fromoffice properties can be highly variable because themarket tends to be sensitive to economicperformance.Onedownsideisthatofficebuildingshavehighoperatingcosts,soifyouloseatenant,itcanhaveasubstantialimpactonthereturnsfortheproperty.However,intimesofprosperity,officestendtoperformextremelywell, because demand for space causes rental rates to increase and an extended time period is required to build an officetowertorelievethepressureonthemarketandrents.

Retail propertyThere is a wide variety of retail properties, ranging from large enclosed shopping malls to single tenant buildings in pedestrian zones. At the present time, the Power Center format is in favour, with retailers occupying larger premises than in the enclosed mall format and having greater visibility and access from adjacent roadways. Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the center. An example of a well-known anchor is Wal-Mart. If a retail property has a food store as an anchor, it is said to be food-anchored or grocery-anchored; such anchors would typically enhance the fundamentals of a property and make it more desirable for investment. Often, a retail center has one or more ancillary multi-bay buildings containing smaller tenants. One of these small units is termed a commercial retail unit (CRU). The demand for retail space has many drivers. Among them are:

Location•Visibility•Population density•Population growth •Relative income levels•

From an economic perspective, retails tend to perform best in growing economies and when retail sales growth is high. Returns from retails tend to be more stable than offices, in part because retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants.


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Industrial propertyIndustrials are often considered the ‘staple’ of the average real estate investor. Generally, they require smaller average investments,arelessmanagementintensiveandhaveloweroperatingcoststhantheirofficeandretailcounterparts.Thereare different types of industrials depending on the use of the building. For example, buildings could be used for warehousing, manufacturing,researchanddevelopment,ordistribution.Someindustrialscanevenhavepartialorfullofficebuild-outs. Some important factors to consider in an industrial property would be functionality (for example, ceiling height), location relativetomajortransportroutes(includingrailorsea),buildingconfiguration,loadingandthedegreeofspecialisationinthespace (such as whether it has cranes or freezers). For some uses, the presence of outdoor or covered yard space is important.

Multi-family residential propertyMulti-family residential property generally delivers the most stable returns, because no matter what the economic cycle, people always need a place to live. The result is that in normal markets, residential occupancy tends to stay reasonably high. Another factor contributing to the stability of residential property is that the loss of a single tenant has a minimal impact on the bottom line,whereasifyouloseatenantinanyothertypeofproperty,thenegativeeffectscanbemuchmoresignificant. For most commercial property types, tenant leases are either net or partially net. This means that most operating expenses can be passed along to tenants. However, residential properties typically do not have this attribute, meaning that the risk of increase in building operating costs is borne by the property owner for the duration of the lease. Apositiveaspectofresidentialpropertiesisthatinsomecountries,government-insuredfinancingisavailable.Attheexpenseofasmallpremium,insuredfinancinglowerstheinterestrateonmortgages,thusenhancingpotentialreturns from the investment.

Non-income-producing real estateNon-income-producing investments such as houses, vacation properties or vacant commercial buildings, are as sound as income-producing investments. If you invest equity in a non-income producing property you will not receive any rent, so all of your return must be through capital appreciation. If you invest in debt secured by non-income-producing real estate, remember that the borrower’s personal income must be sufficient to cover themortgage payments, because there is no tenant income to secure the payments. We can invest into all the given areas and can make return by capital appreciation, rental income, agricultural produce, leaseandcommercialuse.Thefollowingfactorsinfluencethepriceandcostoftherealestate:

The physical characteristics of the property •The property rights •The time horizon of holding the property •Geographical area •The development rate •

1.6 Rental Trends in India Recent trends of rental properties in India are conspicuous by the immense potential that is being realised today. Rental values in cities like Delhi and outskirts are witnessing an increase of 20-25%. Real estate agents are devoting themselves to negotiations for rented homes than ever. Though the interest rates on home loans, continued tax exemptionsonsuchpromptspeopletobuyproperty,thosewiththeabilitytobuyaflatamongthemiddle-classarethinkingtwice.Inresidentialsegment,thecapitalvalueorcostofflatshasalmostdoubledincitieslikeGurgaonwhereprices went up to Rs. 45 lakhs from Rs. 15 lakhs a couple of years back. The demand for more capital appreciation in the wake of rising prices coupled with home loan rate hike has dampened the buying spirit. This has in ways propelled demand for rental property in India. Increased demand for independent houses or paying guests occurs mainly in the metros like Delhi, Gurgaon, and Mumbai and so on where the corporate sectors rent independent houses for their senior executives. A paying guest or PG accommodation in India is a convenient arrangement. Even PG hostels and working women’s hostels, are considered safe and can be availed of on an individual or sharing basis mean big business.

http://www.investopedia.com/terms/b/bottomline.asp

http://www.investopedia.com/terms/c/capitalappreciation.asp

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The real estate rental trends in commercial sector are momentous. This is because the key tendency among the investors is to rent a commercial space instead of buying. It will facilitate low risk and less worry on maintenance. Commercialrentalsincludingcorporateofficespace,BPOspaces,mallspace,shopsandshowroomsareanintegralpart of the commercial rentals in India. Buying good space in high quality development and leasing it to a good brand is a wise investment decision. Usually, commercial lease agreements specify a 15% escalation in the real estate rental in every three years which is a good enough yield. For those considering regular rental returns rather than capital appreciation, mall space has the distinction to be an excellent option. It gives returns higher than that receivedwithofficespaceandmuchhigherthantherentalreturnsfromresidentialspace.

1.7 Features of Real Estate MarketsThe unique features of the real estate market which must be accommodated include:

Durability •Heterogeneous •High transaction costs •Long time delays •Both an investment good and consumption good •Immobility•

1.8 Fundamental Factors Determining the Value of Real Estate These factors include:Demand Demand refers to people’s willingness and ability to buy or rent a given property. In part demand stems from a market area’s base. In most real estate markets, the source of buying power comes from jobs. Property values follow an upward path when employment is increasing. The real estate market in India has seen remarkable changes in the past few years. The rapid expansions of IT, especially BPOs, spurt in the middle class income and 8% growth in GDP are the potential key factors for the growth.

India is the 4th largest economy in the world, and has the 2nd highest GDP among the developing countries based on purchasing power parity. IT and IT enable services sector in India is still in its growing stage due to increasing demand for business processing units in India and is estimated to grow by 107% to $583 million in revenue. This could lead to a space requirement of 20-25 million sq. ft. per annum, according to a Merrill Lynch report. Taking this factor into consideration, the total value of real estate created by the IT and ITES sector in the next three years will be Rs.132000.

Supply analysis Supply analysis means sizing up the competition. Nobody wants to pay more for a property than the price they can pay for competing property. An integral part of value analysis requires identifying sources of potential competition and then inventorying them by price and features. An analysis of supply should not limit potential competitors to geographically and physically similar properties. For example, in some markets low priced single family houses might compete with condominium units, manufactured homes and even with rental apartments.

The property The property itself is a key ingredient in real estate. The price that people will pay is governed by their needs and the relative prices of the properties available to meet those needs. To try to develop property’s competitive edge, an investorshouldconsiderfivethings:

Restrictions on use •Location •Site characteristics •Improvements •Property management •


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The property transfer process Inefficientmarkets,informationflowssoquicklyamongbuyersandsellersthatitisvirtuallyimpossibleforaninvestor to outperform the average systematically. As soon as something good or bad occurs, the prices of the affectedcompany’sstockadjusttoreflectitscurrentpotentialforearningsorlosses.Realestatemarketsarenotasefficientasstockmarkets.

1.9 Indian Brand Equity Foundation Industry Updates: Real estateThe Indian economy has witnessed robust growth in the last few years and is expected to be one of the fastest growing economies in the coming years. Demand for commercial property is being driven by India’s economic growth. Real estate in India contributes about 5% to India’s gross domestic product (GDP). The total revenue generated in 2010-11 stood at US$ 66.8 billion.

Demand is expected to grow at a compound annual growth rate (CAGR) of 19% between 2010 and 2014 -Tier 1 metropolitan cities are projected to account for about 40% of this. Growing requirements of space from sectors such as education, healthcare and tourism provide opportunities in the real estate sector. FDI of more than US$ 9 billion was infused in real estate in the last decade. In 2010, over 11% of total FDI in India was in the real estate sector. Therehavebeen110dealsinthissectorduringtheperiod2001tothefirsthalfof2011.Urbanpopulationhasbeenincreasingandisexpectedtocross590millionby2030.Urbanisationandgrowinghouseholdincomeinfluencedemand for residential real estate and growth in the retail sector.

InvestmentsReal estate emerged as the popular sector for private equity funds who invested US$1,700 million in this sector during 2011. Private equity in real estate projects will fetch considerable returns by next year-end or early 2013, as per Vikram Hosangady, Partner, KPMG.

Some of the recent investments in this sector are mentioned below:Sahara India has joined hands with the US-based Turner Construction Company. The JV, Sahara Turner •Construction, will build integrated townships called Sahara City Homes and other Sahara India projects in India worth US$ 25 billion over the next 20 years.DLF acquired the additional 26% stake in its joint venture company—DLF Hotels & Hospitality Ltd (DHHL)—•fromAroParticipationLtdandSplendidPropertyCompanyLtd,affiliatesofHiltonInternational.Atpresent,the company holds 74% equity in DHHL.Pride Group of Hotels, which owns a chain of upscale mid-market and business hotels is planning to set up a •series of new properties and this will involve an investment of Rs 1,000 crore (US$ 203.18 million) over the next few years. The company plans to have a mix of owned and managed properties having 3,500 rooms by 2015-16.

Government initiativesThe foreign direct investment (FDI) up to 100% is allowed with Government’s permission for developing •townships and settlements.New home loan borrowers of up to Rs 1.5 million (US$ 30,477) will get Rs 14,865 (US$ 302) as interest •subsidy from the Government, on the condition that the cost of the house should not exceed Rs 2.5 million (US$ 50,798).Allowing 100% FDI under the automatic route in development of Special Economic Zones (SEZ), subject to •the provisions of Special Economic Zones Act, 2005 and the SEZ Policy of the Department of Commerce.

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IntheUnionbudget2011-12,PranabMukherjee,Unionfinanceministerpresentedvariousinitiativesfortherealestate sector, especially focussing on affordable housing. Some of these initiatives are listed below:

Increasing the limit on housing loans eligible for a 1% subsidy in interest rates.•Widening the scope for housing under ‘priority-sector lending’ for banks, making interest rates cheaper on •them.Allocating substantial amount to the Urban Development Ministry for spending on extension of Metro networks •in Delhi, Bengaluru and Chennai.Earmarking US$ 20.03 million for the urban infrastructure development project. The Urban Development •MinistryreceivedUS$1.5billion,anincreaseofUS$68.53millionfromthelastfiscal2010-11.

Road aheadReal estate plays an important role in the Indian economy. This sector is the second largest employer after agriculture and is expected to grow at the rate of 30% over the next decade. The size of the Indian real estate market is expected to touch US$ 180 billion by 2020.

The housing sector alone contributes to 5 to 6% of the India’s GDP. Retail, hospitality and commercial real estate are also growing considerably, providing the much-awaited infrastructure towards India’s growing needs.

According to a study by ICRA, the construction industry in India ranks 3rd among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. A unit rise in construction spending generates 5 times the income, having a multiplier effect across the board. With backward and forward linkages to over 250 ancillary industries, the positive effects of real estate growth spread far and wide. Thus, real estate acts as a catalyst for adding momentum to the Indian economy growth.


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SummaryReal estate or immovable property is a legal term that encompasses land along with anything permanently •affixedtotheland(suchasbuildings).Real estate is often synonymous with real property (also called reality), in contrast with personal property (also •called personality). The term real estate and real property are used primarily in common law, while civil law jurisdiction refers •instead to immovable property. In law, the word real means relating to a thing as distinguished from a person. •In an ownership interest, the investor is entitled to the full rights of ownership of the land (for example, to legally •use and transfer the title of the land/property), and must also assume the risks and responsibilities of a landowner (for example, any losses as a result of natural disasters and the obligation to pay property taxes). If you rent an apartment, you have a leasehold interest in real estate. If you own a home, you have an ownership •interest in that home. Purchasingrealestaterequiresasignificantinvestmentandeachparceloflandhasuniquecharacteristic.•Real property (immovable property) can refer to the real estate itself or to various types of ownership interests •in real estate.Officesarethe‘flagship’investmentformanyrealestateowners.•Returnsfromofficepropertiescanbehighlyvariablebecausethemarkettendstobesensitivetoeconomic•performance.Many retail properties have an anchor, which is a large, well-known retailer that acts as a draw to the center.•From an economic perspective, retails tend to perform best in growing economies and when retail sales growth •is high. Returnsfromretailstendtobemorestablethanoffices,inpartbecauseretailleasesaregenerallylongerand•retailersarelessinclinedtorelocateascomparedtoofficetenants.Industrials are often considered the ‘staple’ of the average real estate investor.•Multi-family residential property generally delivers the most stable returns, because no matter what the economic •cycle, people always need a place to live.A positive aspect of residential properties is that in some countries, government-insured financing is •available.Non-income-producing investments such as houses, vacation properties or vacant commercial buildings, are as •sound as income-producing investments.Recent trends of rental properties in India are conspicuous by the immense potential that is being realised •today.Commercialrentalsincludingcorporateofficespace,BPOspaces,mallspace,shopsandshowroomsarean•integral part of the commercial rentals in India.Demand refers to people’s willingness and ability to buy or rent a given property.•India is the 4th largest economy in the world, and has the 2nd highest GDP among the developing countries •based on purchasing power parity.Supply analysis means sizing up the competition. Nobody wants to pay more for a property than the price they •can pay for competing property.The price that people will pay is governed by their needs and the relative prices of the properties available to •meet those needs.The size of the Indian real estate market is expected to touch US$ 180 billion by 2020.•

ReferencesJacobus, C., 2009. • Real Estate: An Introduction to the Profession, 11th ed., Cengage Learning.

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Galaty, F. W. Allaway, W. & Kyle, R. C., 2002. • Modern Real Estate Practice, Dearborn Real Estate. Investopedia. • Exploring Real Estate Investments [pdf] Available at: <http://i.investopedia.com/inv/pdf/tutorials/ExploringRealEstateInvestments.pdf> [Accessed 23 April 2012].Singh, V., 2009. • Prospects & Problems of Real Estate in India [pdf] Available at: <http://www.eurojournals.com/irjfe_24_21.pdf> [Accessed 23 April 2012].arifirfanullah, 2011.• CFA Video Real Estate.mp4 [Video Online] Available at: <http://www.youtube.com/watch?v=4VIgjCtNpPQ> [Accessed 23 April 2012].MortgagesInVancouver, 2010. • Top 3 Real Estate Investment Strategies - The Good, Bad and the Profitable [Video Online] Available at: <http://www.youtube.com/watch?v=csUvFaBDMDs> [Accessed 23 April 2012].

Recommended ReadingVentolo, W. L. & Williams, M. R., 2001. • Fundamentals of Real Estate Appraisal, Dearborn Real Estate. Reilly, J. W., 2000. • Language of Real Estate, Dearborn Real Estate.Tyson, E. Griswold, R. S. & Griswold, Robert S. MBA., 2009. • Real Estate Investing For Dummies, John Wiley & Sons.


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Self AssessmentReal estate is often synonymous with __________.1.

real property a. personal propertyb. personalityc. moneyd.

What refers to improving of land for use by adding or replacing buildings?2. Appraisal a. Brokerage b. Development c. Property management d.

_________ implies assisting buyers and sellers in transactions.3. Appraisal a. Brokerage b. Development c. Property management d.

What provides the owner the right to use the real estate for any lawful purpose and sell when and to whom the 4. owner wishes?

Freeholda. Life estateb. Estate for yearsc. Leaseholdd.

What refers to the right to posses and use real estate pursuant to the terms of a use?5. Freeholda. Life estateb. Estate for yearsc. Leaseholdd.

_______ includes banks, real estate grocers, lawyers and others that facilitate the purchase and sale of real 6. estate.

Developersa. Ownerb. Renterc. Facilitatorsd.

Which of the following sentences is false?7. Life estate refers to an interest in real estate, which is granted to a life tenant until that person dies. a. Estateforyearsissimilartolifeestatebuttermisaspecifiednumberofyears.b. Freehold is the right to posses the free interest in real estate after the expiration of a life estate, estate for c. years or leasehold. Concurrent or co-tenancy is the ownership of an interest in real property by more than one party. d.

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Which of the following sentences is false?8. A leasehold interest only exists when a landowner agrees to pass some of his rights on to a tenant in exchange a. for a payment of rent.If you rent an apartment, you have a freehold interest in real estate. b. If you own a home, you have an ownership interest in that home.c. The term real estate and real property are used primarily in common law.d.

__________refers to people’s willingness and ability to buy or rent a given property.9. Supplya. Demandb. Real estatec. Immovable propertyd.

Which of these is not a unique feature of the real estate market, which must be accommodated?10. Durability a. Heterogeneous b. No time delays c. Immobilityd.


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Chapter II

Prospects and Problems of Real Estate in India

Aim


enlist the key growth drivers of retail real estate•

enumerate the characteristic of real estate market in India•

identify the reasons for present real estate boom•

Objectives


enumerate the reasons for price variations in India•

describe the constraints in the real estate investment•

elucidate the barriers in GDP growth•

Learning outcome


list the features of real estate markets•

describe the fundamental factors determining the value of real estate •

describe the retail real estate•

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2.1 Characteristic of Real Estate Market in IndiaTraditionally, the property market in India has been unorganised and fragmented. However, the recent past has seen a consolidation of positions in the market as developers are stretching their capacities to the maximum to meet thegrowingmarketdemand,whichinturnhasencouragedlargeprojectswithsourcedfinancing.IPOsbylargereal estate developers (such as Sobha, Raheja and DLF) have led to organisation of the market in the Tier I cities (Bombay, Delhi, Madras, Calcutta, Hyderabad, Bangalore, etc.), but Tier II (Coimbatore, Trivandrum, Cochin, Mangalore, Pune, and so on) and Tier III cities (Madurai, Nasik, Baroda, and so on) still demonstrate the traits of an unorganised market. While Indian real estate market lacks transparency compared to more mature real estate markets, theincreasingrequirementsofmulti-nationaloccupiers.Also,theinfluxofinternationalpropertyconsultancieshasled to the introduction of greater availability of market information, both in published and private form pushing the sector to an organised market form.

Fig. 2.1 Cause-effect scenario leading to emergence of organised real estate market in India(Source: http://www.prres.net/papers/Sonia%20_Real_Estate_Sector_The_India_Story.pdf)

2.2 Reasons for Present Real Estate BoomThe various causes for boom in real estate presently are:

Foreign funds The Government has allowed FDI in real estate sector with certain limitation. Recently, the Cabinet Committee on Economic affairs has decided to permit 100% FDI in forms of housing, hotels, resorts, commercial premises, educational institutions, recreational facilities, hospitals and city and regional level infrastructure. This is in order to attract higher investments. Earlier, restrictive norms were imposed on foreign investments with their presence permitted only in the integrated townships. They invest in urban infrastructure such as hotels, shopping malls, large scale residential complexes in new townships, InfoTech parks and special economic zones (SEZ). Over a six domestic realty funds have been setup so far with an amount of over Rs. 3,500 crore.


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Fig. 2.2 FDI in Indian real estate(Source: http://www.eurojournals.com/irjfe_24_21.pdf)

Real estate exposure of banks Commercial banks exposure to real estate sector almost doubled in the 2005-06 over the March 31, 2005 level. In real estate, banks advances for 2005 were Rs. 26,600 crore against Rs. 17,355 crore the year before. The total outstanding loans to real estate rose by 84.4% as on January 20, 2006, according to RBI’s report on macroeconomic andeconomicdevelopmentsin2005-06released.Meanwhile,thehousingfinanceindustrystartedtoexpandrapidly,making home loans easily available to everyone. The supply increased enormously and the demand remained steady, as prices had gone beyond the realistic levels.

Fig. 2.3 Loan disbursement(Source: http://www.eurojournals.com/irjfe_24_21.pdf)

Shortage of land for Special Economic Zone (SEZ)In the great rush to developing special economic zones, a split has emerged between the companies that posses land for the projects and those that do not. As many as 125 projects for over 2, 13,023 acres (86,208 hectares, which is more than half the area of the national capital) were considered at a meeting to a massive 1, 48,290 acres or 70% of the projected land size. For instance, Mahindra Realty does not have the 2,500 acres land for it is proposed SEZ as yet. Out of the 23 multi product SEZ projects for which the data is available, only three were in possession of a total of 30,250 acres of land a month ago. Of this, Reliance Industries accounted for 25,000 acres. Another seven projects had managed to get a portion of the 27,510 acres of the total land they sought. The remaining thirteen projects did not have land totalling 1, 35,000 acres available. Of this, Adani Exports Limited did not have the 75,000 acres of land available at that stage. The companies are not having the required land for their projects making the prices of land very high.

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Investment by IDFC InfrastructureDevelopmentFinanceCompany(IDFC)planstoinvestRs.1,000croreeveryfiveyearsontownshipprojects, InfoTech parks, hotels, retail and transport sectors. According to an expert to a real estate consultancy, there are currently 18 malls in New Delhi, Gurgaon, Nodia and Faridabad, with approximately built up space of 3 million sq. ft. While 66 new mall projects have been announced, the crush in the meantime is on the existing space. Shopsonthefirstandsecondfloorsofthemall,whichwerebeingleasedatratesbetweenRs.175andRs.225persq. ft. two months ago, are now being out at a minimum of Rs. 250 per sq. ft.

10-year tax holiday ThefinanceMinistryhasannounceda10-yeartaxholidayfordevelopersofIndustrialparkssetupfromApril1,2006toMarch31,2009.AccordingtotheIndustrialParkScheme2008notifiedbytheCentralBoardofDirectTaxed (CBDT), the industrial park developers will be eligible for 100% tax deduction which is to be provided for 10 consecutive assessment years out of 15 years after the commencement of operations of such units. The developers will be free to choose the 10 consecutive years for the purpose of availing themselves of the tax holiday.

2.2 Price Variations in India There are variations in the prices of real estate sector in the past. Primarily, there are two causes for the same:

Per Capita Income (PCI)Per capita income is increasing in India. In turn, it has increased the purchasing power of the people. Due to this, over the last year (2006-07) houses prices have increased by 10-90% and commercial property prices by 10-30% in different area of India. Thus, there is a positive correlation of .996 has been found between per capita income and real estate prices.

Fig. 2.4 Per Capita Income(Source: http://www.eurojournals.com/irjfe_24_21.pdf)

GDP at market priceGDP (Gross domestic product), the indicator of the national growth, from the past 2-3 years is increasing by 6.5% to 7.5%. Every rupee spend on the construction add to nearly 60% of GDP. The GDP has increased from the 24, 63,324 crore to 35, 29,240 crore from 2002-03 to 2005-06. So it indicates that how the spending on the construction sector helps the real estate prices to increase.


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Fig. 2.5 GDP(Source: http://www.eurojournals.com/irjfe_24_21.pdf)

2.3 Constraints in the Real Estate Investment The various constraints are as under:

Urban Land Ceiling Regulation Act (ULCRA) The central government has replaced this outdated law in 1999-2000, but the state government has not followed the lead. Some states such as Punjab, UP, MP, Rajasthan, Gujarat and Orissa are yet to act on it. This law has been failed and this is the right time to act on it and to release more land into the market.Thiswilldefinitelylowerthepriceofland,whichaccountsforabout50%ofthepriceofrealestate property in India, unlike the developed countries, where it is much less.

Fig. 2.6 Housing cost in India and US(Source: http://www.eurojournals.com/irjfe_24_21.pdf)

Clear title 90% of the lands in India do not have clear ownership or title, thereby creating a land scarcity. This is due to poor record keeping and outdated complaint processes. All updated records must be computerised to increase transparency in land ownership. And special fast track courts must be set up to clear all legal land disputes in a short period of time.

Stamp duty and registration The cost of transferring land titles must be reduced from rates of 10% stamp duties to reasonable levels of 3 to 5%; similar to prevailing rates in developed countries. This will encourage sellers to pay stamp duties, instead of trying to cheat the government, thus increasing the revenue for the country. The high duties have also encouraged unaccounted money being used in most real estate transactions in India. The registration procedure should also be made transparent and simple so that corruption can be minimised.

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Rental laws Obsolete tenancy and rental control laws keep a large part of the urban properties off the market. The rental laws must be revised to protect the owner and his/her property from the tenant. The tax laws must be revised to make rentingofpropertiesfinanciallyviable.StatessuchasMaharashtra,Goa,BengalandKarnatakahavealreadymadeamendments to the rent act.

Foreclosure laws Thoughthelevelofforeclosureforthehousingfinancecompaniesarerelativelylowataround1.5to2%,thesemust be revised and made up-to-date to suit the current context. The laws for non-payment of Equated Monthly Instalments (EMIs) and consequent foreclosure and repossession of the property law must be revised so that the financingcompanieshavethefinalrightsontheproperty,whichiscollateralforthehousingloan.

Building codes, standards and permissions The building guidelines and standards in various cities and states are neither followed by the developers nor implemented by the authorities.

Development and planning In India, development and planning concerned with real estate sector is not up to the mark. The city or state authorities must use professionals to plan and execute all development plans for cities and towns, with future development in mind. This must be done without political compulsions. This will allow proper zoning within cities and towns, green areas and other infrastructure systems to fall into place as the development plans unfold.

2.4 Indian ScenarioCommercial real estate sector is in boom in India. In the last15 years, post liberalisation of the economy, Indian real estate business has taken an expansion and is expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years. This growth is due to:

Favourable demographics•Increasing purchasing power•Existenceofcustomerfriendlybanksandhousingfinancecompanies•Professionalism in real estate •Favourable reforms initiated by the government to attract global investors•

Up to the end of 2007, real estate sector in India was growing at a very high rate, a situation of boom. The home loans were easily available and RBI was following very liberal policies regarding the interest rates. But in 2008, thethingsarechangingduetothehighinflationrateintheIndianeconomy.Thereisuncertaintyinthemarketasshare market is showing depression and RBI is also increasing bank rate leading to the increase in the interest rates. Sothereducingbuyingpower.ThemajorreasonsforthisdownfallareinflationandthelowrateofGDP.InflationrateisincreasingcontinuouslyinIndiamakingthemarketunstable.Inflationrateistouchingtheheightsasshownbythefiguregivenbelow.


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Date InflationrateFeb 5, 08 3%

Mar 22, 08 6.68%April 4, 08 7%April 26, 08 7.61%May 10, 08 7.82%May 24, 08 8.24%June 7, 08 11.05%June 14, 08 11.43%

Table2.1InflationrateinIndiaBarriers in GDP growth The present contribution of the housing construction industry in India is small when compared to developing and developed countries. This sector contributes only 1% of GDP in India, compared to 3 to 6% in other developing countries. If the above issues are addressed and the economy was to grow at 10% a year, the housing sector would grow at 14% a year and create over new 3.2 million jobs over the next 10 years. The problems are numerous, the solutionsareobviousandclear,butthechoicesaredifficultandfew.Theadvantagesofimplementingthesechangeswill overcome all the negative and political issues which have kept the problems dormant for so long. India does not have option, but to act strongly and immediately. This will provide the force to get Indian economy back on the trackforadoubledigitgrowth.Thefigurebelowshowsthevariousbarriers,keepingGDPgrowthinIndiaat5.5%in 2000, and the resulting GDP growth of 10.1% with the complete reforms by 2010.

Fig. 2.7 Barriers in GDP(Source: http://www.eurojournals.com/irjfe_24_21.pdf)

2.5 Retail Real EstateThe Indian retail industry is observing a structural change with individual small format stores making way for large format shopping malls and hyper-markets. The partial relaxation in FDI regulation (51% FDI in single brand retailing) has provided a boost to the retail segment. At present, the top seven cities of India account for a dominant share in mall space. The total organised retail space absorbed for the year 2006-07 in the top seven cities was around 19 million sq. ft. The following chart depicts the absorption scenario of organised retail space for the year 2006-07. National CapitalRegion(NCR),oneofIndia’smostaffluenturbancentres,dominatestheabsorptionscenariofollowedbyMumbai and Kolkata. Bangalore is emerging as a major retail hub owing to its cosmopolitan character.

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NCR 43%Mumbai 21%Kolkata 12%

Pune 9%Hyderabad 6%Bangalore 5%Chennai 4%

Table 2.2 Absorption of organised retail space, total absorption ~ 19 million sq. ft. (2006-07)

The key growth drivers are:

Rising consumerismWith growth in Indian economy, the spending power of Indians has also increased. Real average household disposable income has roughly doubled since 1985. The combination of rapidly rising household incomes and a growing middle-income population has led to a striking increase in overall consumer spending. This in turn has been driving the exponential growth of the Indian retail industry.

Growth in organised retailingRetailing in India is witnessing a huge revolution. In recent years, retail has emerged as one of the fastest growing industries in the Indian economy. The industry is currently estimated to be about US$ 240 billion in size and is growing at over 6-7% annually. Organised retailing accounts for a small but fast-growing share of the total industry, its share has more than doubled from 2% in FY200to 4.4% (US$ 10.5 billion) in FY2006. Several factors such as increasingdisposableincomes,risingconsumptionduetoincreasinguseofcreditcardsandeasyfinanceoptionsand shopping convenience have driven the growth of organised retail.

Fig. 2.8 Growth of retail industry(Source: http://www.ibef.org/download/Real_Estate_210708.pdf)


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Entry of international retailers into IndiaIndia is attracting large international retailers to its doorstep. According to the latest AT Kearney Global Retail Index 2007, India has been ranked the most attractive country for international retail expansion. Large international retailers are attracted by the huge potential of the Indian retail industry and steady opening up of the sector for FDI. Many international retailers are already resent in the country primarily through the franchisee route and are actively considering expansion. Besides, several other large retailers such as Woolworths and Wal-Mart are planning to enter thecountry.Thesehavealreadytied-upwithIndianpartnersandCarrefourandTESCOwhoarefinalisingtheirplans. In addition to larger retailers entering the market and new retail formats being introduced, growth in demand is also expected to gain momentum.

Entry of Indian corporates into retail industrySeveralIndiancorporatesincludingReliance,Bharti,andTataamongstothershavediversifiedintotheretailsegment.Prozone, a 100% subsidiary of Provogue (India) Limited, a joint venture agreement with the Omaxe Group, plans to develop India’s largest shopping malls across the country focused on tier two cities. In a bid to offer products directly to customers at a competitive rate, large corporates are looking to control the entire retail supply chain by forging tie-ups and opening company owned outlets having footprints across the country.

Concept of specialised malls gaining popularity Specialised malls are gaining popularity with several auto malls, jewellery malls, furniture malls and electronics malls coming up. Many developers are further setting up mixed-use projects offering hotels, amusement facilities and commercial space.

FutureMarket estimates put the growth of organised retail in the range of 25% annually. However, several policy initiatives (51% FDI in single brand retailing) and ongoing policy debate to allow 100% FDI in organised retailing (in both single and multiple brands) holds out lot of promise of the Indian retail. The organised retail can attain a higher annual growth rate. Several national and international corporates have either made a foray into the retail segment orfirmedupplanstoentertheretailsegment.Thiswillbringthemuch-neededcorporatisationintoorganisedretailwithenhancedoperationalefficiency.Also,itwillresultingreatergeographicalreachanddiversificationintotier-IIand III cities.

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SummaryRetailing in India is witnessing a huge revolution. In recent years, retail has emerged as one of the fastest growing •industries in the Indian economy. While Indian real estate market lacks transparency compared to more mature real estate markets, the increasing •requirements of multi-national occupiers.Cabinet Committee on Economic affairs has decided to permit 100% FDI in forms of housing, hotels, resorts, •commercial premises, educational institutions, recreational facilities, hospitals and city and regional level infrastructure.The total outstanding loans to real estate rose by 84.4% as on January 20, 2006, according to RBI’s report on •macroeconomic and economic developments in 2005-06 released.The companies are not having the required land for their projects making the prices of land very high.•InfrastructureDevelopmentFinanceCompany (IDFC)plans to investRs.1, 000 crore everyfiveyears on•township projects, InfoTech parks, hotels, retail and transport sectors.ThefinanceMinistryhasannounceda10-yeartaxholidayfordevelopersofIndustrialparkssetupfromApril•1, 2006 to March 31, 2009.Per capita income is increasing in India. In turn, it has increased the purchasing power of the people.•GDP (Gross domestic product), the indicator of the national growth, from the past 2-3 years is increasing by •6.5% to 7.5%.90% of the lands in India do not have clear ownership or title, thereby creating a land scarcity.•Obsolete tenancy and rental control laws keep a large part of the urban properties off the market.•The cost of transferring land titles must be reduced from rates of 10% stamp duties to reasonable levels of 3 to •5%; similar to prevailing rates in developed countries.The laws for non-payment of Equated Monthly Instalments (EMIs) and consequent foreclosure and repossession •ofthepropertylawmustberevisedsothatthefinancingcompanieshavethefinalrightsontheproperty,whichis collateral for the housing loan. In the last15 years, post liberalisation of the economy, Indian real estate business has taken an expansion and is •expected to grow from the current USD 14 billion to a USD 102 billion in the next 10 years. The Indian retail industry is observing a structural change with individual small format stores making way for •large format shopping malls and hyper-markets.Real average household disposable income has roughly doubled since 1985.•India is attracting large international retailers to its doorstep.•In addition to larger retailers entering the market and new retail formats being introduced, growth in demand •is also expected to gain momentum.Specialised malls are gaining popularity with several auto malls, jewellery malls, furniture malls and electronics •malls coming up.Market estimates put the growth of organised retail in the range of 25% annually.•

ReferencesJacobus, C., 2009. • Real Estate: An Introduction to the Profession, 11th ed., Cengage Learning.Lynn, D. L. & Wang, T., 2010. • Emerging Market Real Estate Investment: Investing in China, India, and Brazil, John Wiley & Sons.Sonia, S., • Real Estate Sector - The India Story [pdf] Available at: <http://www.prres.net/papers/Sonia%20_Real_Estate_Sector_The_India_Story.pdf > [Accessed 23 April 2012].Singh, V., 2009. • Prospects & Problems of Real Estate in India [pdf] Available at: <http://www.eurojournals.com/irjfe_24_21.pdf> [Accessed 23 April 2012].


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arifirfanullah, 2011.• CFA Video Real Estate.mp4 [Video Online] Available at: <http://www.youtube.com/watch?v=4VIgjCtNpPQ> [Accessed 23 April 2012].researchonindia, 2012. • Top Facilities Management Services Market in India 2012 - Sample.mp4 [Video Online] Available at: <http://www.youtube.com/watch?v=tmHFDZmiaZs > [Accessed 23 April 2012].

Recommended ReadingGalaty, F. W. Allaway, W. & Kyle, R. C., 2002. • Modern Real Estate Practice, Dearborn Real Estate. Palit, A. & Bhattacharje, S., 2008. • Special Economic Zones in India: Myths and Realities, Anthem Press.Tyson, E. Griswold, R. S. & Griswold, Robert S. MBA., 2009. • Real Estate Investing For Dummies, John Wiley & Sons.

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Self AssessmentWhich of these is not included in Tier I cities?1.

Mumbaia. Delhib. Punec. Chennaid.

Which of these is not a reason for real estate boom at present?2. National fundsa. Shortage of banks for SEZb. Real estate exposure of banksc. Investment for IDFCd.

________ is the indicator of the national growth.3. GDPa. SEZb. ULCRAc. EMIsd.

Which is a 100% subsidiary of Provogue (India) Limited, a joint venture agreement with the Omaxe Group?4. Prozonea. Bhartib. Tatac. Relianced.

_________planstoinvestRs.1,000croreeveryfiveyearsontownshipprojects,InfoTechparks,hotels,retail5. and transport sectors.

ULCRAa. CBDTb. IDFCc. TESCOd.

Which of these do not include a reason for Indian real business growth?6. Favourable demographicsa. Increasing purchasing powerb. Professionalism in real estate c. Urban Land Ceiling Regulation Actd.

ThefinanceMinistryhasannounceda__________taxholidayfordevelopersofIndustrialparkssetupfrom7. April 1, 2006 to March 31, 2009.

10-yeara. 15-yearb. 20-yearc. 12-yeard.


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Which of the following statements is true?8. In the great rush to developing special economic zones, a split has emerged between the companies that a. posses land for the projects and those that do not.Per capita income is decreasing in India.b. There is a negative correlation of .996 has been found between per capita income and real estate prices.c. Per capita income, the indicator of the national growth, from the past 2-3 years is increasing by 6.5% to d. 7.5%.

Which of the following statements is false?9. 40% of the lands in India do not have clear ownership or title, thereby creating a land scarcity.a. The cost of transferring land titles must be reduced from rates of 10% stamp duties to reasonable levels of b. 3 to 5%; similar to prevailing rates in developed countries.States such as Maharashtra, Goa, Bengal and Karnataka have already made amendments to the rent act.c. The building guidelines and standards in various cities and states are neither followed by the developers d. nor implemented by the authorities.

WhichisoneofIndia’smostaffluenturbancentres?10. NCRa. Delhib. Mumbaic. Puned.

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Chapter III

Unorganised vs. Organised Retail in India

Aim


defineretail•

enumerate the causes of low productivity in unorganised retail•

enlist the characteristics of unorganised retail in India•

Objectives


describe organised retailing •

elucidate the success of organisation in other domestic industries•

state the major formats of in-store retailing•

Learning outcome


compare organised and unorganised sectors•

elucidate retailing in India•

describe unorganised retailing•


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3.1 RetailIn2004,TheHighCourtofDelhidefinedtheterm‘retail’asasaleforfinalconsumptionincontrasttoasaleforfurther sale or processing (i.e., wholesale), a sale to the ultimate consumer. Thus, retailing is the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. Retailing is the last link that connects individual consumer with manufacturing and distribution chain. A retailer is involved in the act ofsellinggoodstotheindividualconsumeratamarginofprofit.Retailingisthesetofbusinessactivitiesthataddsvalue to the products and services sold to consumers for their personal or family use. Retailing is not only the sale of products in stores, but retailing also involves the sale of services such as overnight lodging in a motel, a doctor’s exam, a haircut, a DVD rental, or a home-delivered pizza.

3.2 Retailing in IndiaIndia’s strong growth fundamentals, high saving and investment rates, fast growth in labour force and, increased consumer spending has made it a very favourable retail destination globally. Indian consumers continue to urbanise, started spending more on non-food purchases and have more exposure to brands, this has resulted in powerful, more discerning consumer class. India’s nearly 1.2 billion population is also an attractive target for the global brands. India’s retail sector is on its way of modernisation. Traditional markets are making way for new formats such as departmental stores, supermarkets and speciality stores. Westernised malls can be seen fast appearing in metros and tier-II cities, introducing the Indian consumer to an implausible shopping experience.

ATKearney,thewell-knowninternationalmanagementconsultancyfirmannuallyranksemergingmarketeconomiesbasedonmorethan25macroeconomicandretail-specificvariablesthroughtheirGlobalRetailDevelopmentIndex(GRDI). In its 2011 edition, it has ranked India 4th indicating that the country is one of the most attractive markets for global retailers to enter. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes.

3.3 Organised vs. Unorganised SectorsReal estate can be segmented into organised and unorganised sector where the unorganised sector commands around 70% of the market share. The Indian retail sector is highly fragmented, with a major share of its business is being run by unorganised retailers like the traditional family run stores and corner stores. However, the organised retail is at a very budding stage, though attempts are being made to increase its proportion bringing in a huge opportunity for prospective new players.

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Fig. 3.1 Structure and segment – Indian real estate sector(Source: http://www.dnb.co.in/RealEstate2008/Overview.asp)

3.4 Unorganised Retail in IndiaRetail in India is essentially unorganised. 98% of the retail industry is made up of counter-stores, street markets, hole-in-the-wall shops and roadside peddlers. Unorganised retail is characterised by:

Family-run stores •Lack of best practices when it comes to inventory control and supply-chain management •Lack of standardisation •Essentially a sector populated by anyone who has something to sell •

Unorganised retail is essentially the next-step above agriculture for those seeking a higher income. Combining this with very few barriers to entry in the retail sector is an industry run by people commonly referred to as ‘baniyas’, with a lack of education, experience and exposure. This is the major factor responsible for the manner in which the retail industry functions. The productivity of this sector is approximately 4% that of the US retail industry.

Indian retail is dominated by a large number of small retailers consisting of the local kirana shops, owner-manned general stores, chemists, footwear shops, apparel shops, local betel leaf and tobacco shops, hand-cart hawkers, pavement vendors, etc. which together make up the so-called ‘unorganised retail’ or traditional retail. The last few years have witnessed the entry of a number of organised retailers opening stores in various modern formats in metros and other important cities. Unorganised retailers normally do not pay taxes and most of them are not even registered for sales tax, VAT or income tax.

The causes of low productivity in unorganised retail include:Labour intensity: • Counter-stores in India have a very low output to labour consumption ratio. Low labour costs, failure to employ part-time labour and the absence of multitasking are the mainly responsible for the unusually high consumption of labour. This has driven down the productivity in the sector.


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Inventory and supply chain management:• Unorganised retailers in India rarely track consumer behavior and sales data to improve their inventory management practices. Even among the handful of retailers that employ experience-based improvements in their business, their efforts are largely met with no support from their suppliers. Counter stores and street vendors do not have the infrastructure, exposure or credibility to form lasting relationships with suppliers. As a result, retailers usually use different suppliers every time they purchase inventory. This leaves them largely incapable of strategically managing their business. Excess supply of counter-stores and street vendors:• With 700 million agricultural labours looking to move into retail, low barriers to entry and the absence of regulation in this sector have made it a largely over-supplied sector. The excess supply of counter-stores and street vendors represents a tremendous decrease in the productivity of this sector. No real competition:• Almostallretailersfindawaytomakeendsmeetorchangetheirmerchandisetilltheymake ends meet. The absence of any real competition is also responsible for a form of status quo in the sector wherelittletonoimprovementsinefficiency,managementandbyextensionproductivityareseen.Infact,thissector is so stagnant with respect to operational changes that no improvement in productivity is expected in the near future.

Low productivity, but still successful Lowproductivityisonlyanindicationofunderutilisationand/oroverallocationofresources.Itdoesnotreflectthe market share or potential of the unorganised retail sector when it comes to catering to the Indian consumer. The unorganised retail sector competes on the basis of a number of factors that give it a leg up on organised retail. Unorganised retail has dominated the retail market. The reason is the unique ways in which it operates when it comes to serving the consumer. For unorganised retail in India, the market mantra is ‘convenience’.

Home-delivery: Corner-stores and street vendors do their best to cater to the local population in the area in which they operate. As a result most of them provide home-delivery services, for any and all order sizes, at no extra charge. Shopping is as simple as making a phone call and narrating the shopping list to the store owner. Within minutes, the entire list of groceries with an itemised, hand-written bill reaches your doorstep. The absence of product variety, brand diversity, marketing and exposure had made shopping in stores almost unnecessary for the Indian consumer. Retailers had no problem in understanding this dynamic and adapting to the needs of the Indian consumer.

Credit: The personal nature of transactions coupled with small transaction sizes allows unorganised retailers to sell goods on credit often settling bills with clients at the end of the month.

Proximity: Unorganised retailers like corner stores are almost always located at a few minutes walking distance from their clients. Street vendors will go door-to-door selling their goods. This has provided a number of advantages to the Indian consumer, receiving purchase almost immediately thanks to the home-delivery of goods, not moving more than half a mile from house to purchase food, clothing and other goods. Finally, the proximity of unorganised retailers caters to the just-in-time mentality of Indian consumers who prefer to buy goods when needed for immediate use rather than making bulk purchases in advance.

Cutting costs in any possible way: legal and illegal Convenience is not the only aspect of unorganised retail that has allowed it to dominate the industry. The unorganised natureofthissectorhasalsoallowedittosurvivepricecompetitionwithlarge-scaleorganisedretailerswithefficientsupply management, inventory control and bulk purchasing. Unorganised retail with their small inventory, high purchasecostsandrelativelysmallsizehavebeenabletosaveonanumberofotherfixedandvariableinputcoststo offer goods at competitive prices.

Real-estate: Unorganised retailers usually operate from their residences that double-up as counter stores or like street-vendors carry their merchandise with them. As a result, they incur little to no real-estate costs.

Labour costs: Unorganised retailers usually staff their stored with family members who have no other source of employment than to work in the family store as labour costs are low. In addition, the lack of regulation in the sector as well as high unemployment levels in India allow unorganised retailers to higher labour at very low rates.

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Utilities: Corner stores operating out of homes usually pay residential rates for utilities like electricity and water. With the large disparity between commercial and residential utility rates, unorganised retailers do not have to worry abouttheseinputseatingintotheirprofits.

Tax: Unorganised retailers rarely pay taxes due to the absence of regulation and supervision in this sector. This also allows them to reduce price.

Unorganised retail has dominated the Indian market for decades. The small scale of each vendor was perfect to cater to the reluctant Indian shopper while the large number of players kept several people employed. In this situation there was little motivation to bring organisation into the sector. It took strong economic growth, liberalisation of the economy and change in the Indian mind-set to realise the advantages of bringing organisation to India’s retail industry. Organised retail has a bright future in India, but not one that will be easy to achieve. The lack of supporting infrastructure of the country will pose a unique challenge to organised retailers who must strike a delicate balance between adaptation and innovation to succeed in the industry.

3.5 Organised Retail in India Organised retail in India refers to the modern retail formats like supermarkets and hypermarkets prevalent in most developed countries. This form of retail accounts for a painfully low 2% of the retail industry, but is growing at a healthy 35% and is expected to cross the INR 1000 billion mark by 2010. Organised retail remained a dormant sector largely due to the lack of infrastructure for large-scale retail, absence of product variety and a conservative Indian consumer.Today,thefloodofproductsinthemarketcoupledwithawealthier,moreinformedIndianconsumerhavecreated the atmosphere for the entry of organised retail to tap into the $320 billion Indian retail industry.

Organised retailing refers to trading activities undertaken by licensed retailers who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. According to AT Kearney report for the year 2011, organised retail accounts for 7% of India’s roughly US$ 435 billion retail market and is expected to reach 20% by 2020. Food accounts for 70% of Indian retail, but it remains under-penetrated by organised retail. Organised retail has a 31% share in clothing and apparel and continues to see growth in this sector. The home segment shows promise, growing 20 to 30% per year. India’s more urban consumer mindset means this sector is poised for growth.

The retail segment has undergone a major transformation as unorganised sectors have given way to the organised sector (malls and multiplexes) gradually. The Indian organised retail player has good growth prospects and hence prominent corporate houses have entered this segment under multiple retail formats and have announced major expansion plans. Moreover, many international players have entered the segment and some more have plans to set up operations in India. Some of the retail formats operational in India are specialty stores, department stores, supermarkets/convenience stores, hypermarkets and discount stores.

Over the past few years, the organised retail space has expanded rapidly.

According to ASSOCHAM, the organised retailers occupied a space of around 1 mn sq ft in 2002, which shot up to nearly 14 mn sq ft in just 5 years in 2007. The number of retail outlets in the organised sector in 2001 was around 3,000 and it covered an area of about 3 mn sq ft. In 2006, the number of outlets grew to around 27,000 covering an area of 31 mn sq ft. Further, a number of big retailers had lined up expansion plans and had geared up to tap new markets however, the current crises is expected to act as a dampener for these expansions plans. The retailers are now turning their focus on tier II and tier III cities and are also focusing on rural areas. Many corporates have opened rural malls like Chaupal Sagar (ITC), Aadhaar (Godrej) and Hariyali Bazaars (DCM Sriram - focusing mainly on agri-products) where the aim is to cater and to leverage the opportunity available at the bottom of the pyramid. This is fueling the demand for retail real estate.


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Current and future players Organised retail in India is currently dominated by players that have been in the market for at most two decades. Pantaloon Retail is the market leader with its Wal-Mart-esque multipurpose low cost stores as well as specialised clothing retail outlets. Shopper’s Stop operates multi-storey malls in the major metros and is the equivalent of a Macy’s in the US. A number of other individual brand retailers such as Haldiram, Raymonds and Titan also represent organised retail in India. Today, a number of major business houses in India are launching massive organised retail ventures like Reliance, Bharti (in a Joint-Venture with WalMart) and The Aditya Birla Group. These companies that control many of the other industries in India have recognised the potential of organised retail. They are leveraging their enormous cash reserves and decades of experience of doing business in the Indian economy and reaching out to the Indian consumer to launch many multi-store retail chains.

Learning from USA and China As the counter-stores and street vendors of unorganised retail are converted to the supermarkets and malls of organised retail, comparisons with countries that have already undergone this evolution draws some important revelations about the future of organised retail in India. USA and UK are the pioneers of organised retail. Beginning in the 1950’s, it took four decades of experimentation with a variety of retail formats before the US completed the evolution of its organised retail sector into a giant multi-billion dollar industry.

Today, the organised retailers in India with their supermarkets, hypermarkets, malls, departmental stores and boutiques are simultaneously experimenting with all the possible formats of retail that were developed sequentially in US. With US and Chinese experience to draw from, organised retail will likely mature at a rate even faster than that witnessed in China.

A major factor that accelerated the development of organised retail in China was the large disparities between urban and rural organised retail penetration. While major cities in China witnessed the saturation and maturity of organised retail, the rural areas were still seeing organised retail in the infancy or early development phase. This forced large-retail chains to equip themselves with the skills necessary to handle all stages of development. India, with a similar rural-urban divide is witnessing the same multi-stage development of organised retail across the country. Thus, India is likely to witness the same compacted evolution in organised retail that accelerated the development of this sector in China.

The success of organisation in other domestic industries Aside from international examples, India can also draw from domestic instances to support the bright future of the organised retail sector in the country. The telecom industry in India saw a stagnant 1% market penetration. With the introductionofmultipletechnologies,removalofmarketregulationsandinfluxofcapital,thetelecomindustrysawa compressed evolution cycle where penetration reached 10% in a matter of 8 years. Today, the Indian cell-phone industry is one of the fastest growing in the world. Organisation of the telecom sector was integral to tap into the unrealised potential of the giant but unrecognised Indian consumer market. Organisation in the retail sector is likely to have the same effect.

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Format Description The Value PropositionBranded Stores Exclusive showrooms either owned or

franchised out by a manufacturer.Complete range available for a given brand, certifiedproductquality

Specialty Stores Focusona specificconsumerneed, carrymost of the brands available

Greater choice to the consumer, comparison between brands is possible

Department Stores Large stores having a wide variety of products, organised into different departments such as clothing, house wares, furniture, appliances, toys, etc.

One stop shop catering to varied/ consumer needs.

Supermarkets Extremely large self-service retail outlets One stop shop catering to varied consumer needs

Discount Stores Stores offering discounts on the retail price through selling high volumes and reaping economies of scale

Low Prices

Hyper-mart Larger than a supermarket, sometimes with a warehouse appearance, generally located in quieter parts of the city

Low prices, vast choice available including services such as cafeterias.

Convenience stores Small self-service formats located in crowded urban areas.

Convenient location and extended operating hours.

Shopping Malls An enclosure having different formats of in-store retailers, all under one roof.

Variety of shops available to each other.

Table 3.1 Major formats of in-store retailing


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SummaryRetailing is the interface between the producer and the individual consumer buying for personal •consumption. Retailing is the last link that connects individual consumer with manufacturing and distribution chain. •Aretailerisinvolvedintheactofsellinggoodstotheindividualconsumeratamarginofprofit.•Retailing is the set of business activities that adds value to the products and services sold to consumers for their •personal or family use.Indian consumers continue to urbanise, started spending more on non-food purchases and have more exposure •to brands, this has resulted in powerful, more discerning consumer class.Real estate can be segmented into organised and unorganised sector where the unorganised sector commands •around 70% of the market share.The organised retail is at a very budding stage, though attempts are being made to increase its proportion bringing •in a huge opportunity for prospective new players.98% of the retail industry is made up of counter-stores, street markets, hole-in-the-wall shops and roadside •peddlers.Unorganised retail is essentially the next-step above agriculture for those seeking a higher income.•Low productivity is only an indication of underutilisation and/or over allocation of resources.•The small scale of each vendor was perfect to cater to the reluctant Indian shopper while the large number of •players kept several people employed.Organised retail in India refers to the modern retail formats like supermarkets and hypermarkets prevalent in •most developed countries.Organised retailing refers to trading activities undertaken by licensed retailers who are registered for sales tax, •income tax, etc.Pantaloon retail is the market leader with its Wal-Mart-esque multipurpose low cost stores as well as specialised •clothing retail outlets.Today, the Indian cell-phone industry is one of the fastest growing in the world.•Withtheintroductionofmultipletechnologies,removalofmarketregulationsandinfluxofcapital,thetelecom•industry saw a compressed evolution cycle where penetration reached 10% in a matter of 8 years.

ReferencesMukherjee, A. & Patel, N., 2005. • FDI in Retail Sector, India, Academic Foundation.Pradhan, 2009. • Retailing Management 3E, 3rd ed., Tata McGraw-Hill Education.Sonia, S., • Real Estate Sector - The India Story [pdf] Available at: <http://www.prres.net/papers/Sonia%20_Real_Estate_Sector_The_India_Story.pdf > [Accessed 23 April 2012].India in Business, • Retailing [Online] Available at: <http://www.indiainbusiness.nic.in/industry-infrastructure/service-sectors/retailing.htm> [Accessed 23 April 2012].arifirfanullah, 2011.• CFA Video Real Estate.mp4 [Video Online] Available at: <http://www.youtube.com/watch?v=4VIgjCtNpPQ> [Accessed 23 April 2012].researchonindia, 2012. • Top Facilities Management Services Market in India 2012 - Sample.mp4 [Video Online] Available at: <http://www.youtube.com/watch?v=tmHFDZmiaZs > [Accessed 23 April 2012].

Recommended ReadingMehrotra, N., 2007. • Indian Retail Sector - A Primer, ICFAI Books. Pradhan, S., 2006. • Retailing Management 2E, Tata McGraw-Hill Education.Lamba., 2002. • The Art of Retailing (Book Only), Tata McGraw-Hill Education.

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Self Assessment_______is the interface between the producer and the individual consumer buying for personal consumption.1.

Sellinga. Retailingb. Marketingc. Manufacturingd.

Real estate can be segmented into organised and unorganised sector where the unorganised sector commands 2. around _________of the market share.

70%a. 10%b. 90%c. 50%d.

Which of these is not a feature of unorganised retail?3. Unorganised retail includes family-run stores.a. Unorganised retail lack best practices when it comes to inventory control and supply-chain management.b. Unorganised retail lack of standardisation.c. Unorganised retail is essentially a sector populated by anyone who has something to buy. d.

The productivity of the unorganised sector is approximately _______that of the US retail industry.4. 8%a. 4%b. 7%c. 12%d.

Which of these do not include the causes of low productivity in unorganised retail?5. Labour intensitya. Inventory and supply chain management b. No supply of counter-stores and street vendorsc. No real competitiond.

Organised retailing refers to _______activities undertaken by licensed retailers who are registered for sales tax, 6. income tax, etc.

tradinga. manufacturingb. sellingc. competingd.

_________is the market leader with its Wal-Mart-esque multipurpose low cost stores as well as specialised 7. clothing retail outlets.

Shopper’s Stopa. Raymondsb. Titanc. Pantaloon Retaild.


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Which of the following is larger than a supermarket, sometimes with a warehouse appearance and is generally 8. located in quieter parts of the city?

Hyper-marta. Supermarketsb. Convenience storesc. Shopping mallsd.

Which of the following statements is true?9. Specialitystoresfocusonaspecificconsumerneedandcarrymostofthebrandsavailable.a. Shopping malls are exclusive showrooms either owned or franchised out by a manufacturer.b. Convenience stores are those stores offering discounts on the retail price through selling high volumes and c. reaping economies of scale.Hyper-mart is an enclosure having different formats of in-store retailers, all under one roof.d.

Which of the following statements is false?10. A major factor that accelerated the development of organised retail in China was the large disparities between a. urban and rural organised retail penetration.The retail segment has undergone a major transformation as unorganised sectors have given way to the b. organised sector (malls and multiplexes) gradually.Unorganised retailers like corner stores are almost always located at a few minutes walking distance from c. their clients. Convenience is the only aspect of unorganised retail that has allowed it to dominate the industry.d.

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Chapter IV

Multi-channel Retailing

Aim


defineretailchannel•

enumerate the different types of retail channels•

enlist the characteristics of internet channel•

Objectives


describe direct selling •

elucidate the features of catalogue channel•

statethebenefitsofferedbytheretailchannels•

Learning outcome


describe the consumer shopping behavior•

explain the perceived risks in electronic shopping•

enlistthebenefitsofmultichannelretailing•


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4.1 Retail ChannelA retail channel is the way a retailer sells and delivers merchandise and services to its customers. The most common channel used by retailers is a store. Retailers also use a variety of non-store channels including the Internet, catalogues and direct mail, direct selling, television home shopping, and automated retailing. The vast majority of sales are madethroughthestorechannel,butthecatalogueandInternetchannelsalsoaccountforsignificantsales.Non-storeretailers make ranges of products available to potential consumers in a number of different ways. Some retailers take the product directly to the customer. However, the majority of non-store retailers offer their products via some form of product representation, whether on paper or screen-based visual display.

Catalogue retailing K Raheja Group, Shoppers Stop, Croma

TV retailing QVC, Home Shopping Network

Internet retailing (via PC, mobile) Amazon.com, E-Bay.com

Table 4.1 Non-store formats used in retailing

Fig. 4.1 Retail infrastructure: Store based, traditional non-store and ‘e-retail’(Source: Varley, R., 2006. Retail Product Management: Buying and Merchandising, 2nd ed., Rouledge)

4.2 Internet ChannelInternet retailing, also called online retailing, electronic retailing and e-tailing, is a retail channel in which the offering of products and services for sale is communicated to customers over the Internet. A decade ago retail experts predicted that a new breed of high-tech, Web-savvy entrepreneurs would dominate the retail industry. Everyone would be doingtheirshoppingovertheInternet.Storeswouldcloseduetolackoftrafficandpapercatalogueswouldbecomeoutdated. Even though sales through the Internet channel are forecasted to grow at about 10% annually, more than three times faster than sales through the store or catalogue channel, Internet sales are expected to represent less than 10% of retail sales (excluding automotive and food services) by 2013. More than one quarter of apparel shoppers look up basic information about stores, such as location, hours, or special events, on retailer sites; 22% research merchandise; 21% compare prices; and 21% download coupons for use in stores. Thus, Internet facilitates rather then revolutionises retailing.

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4.3 Catalogue ChannelThe catalogue channel is a non-store retail channel in which the retail offering is communicated to customers through a catalogue mailed to customers. More than half of US consumers shop through catalogues each year. The merchandise categories with the greatest catalogue sales are drugs and beauty aids, computers and software, clothing andaccessories,furnitureandhousewaresandbooks,musicandmagazines.Althoughfirmsspendmillionsofdollarsmailing catalogues, only about 1.3% of the catalogues mailed generate a direct sale. The use of catalogues is coming under attack from consumer groups that believe that catalogues are an unnecessary waste of natural resources.

4.4 Direct SellingDirect selling is a retail channel in which salespeople interact with customers face-to-face in a convenient location, eitheratthecustomer’shomeoratwork.Directsalespeopledemonstratemerchandisebenefitsand/orexplainaservice; take an order; and deliver the merchandise. Direct selling is a highly interactive retail channel in which considerable information is conveyed to customers through face-to-face discussions. However, providing this high level of information, including extensive demonstrations, is costly.

The largest categories of merchandise sold through direct selling are:Personal care (for example, cosmetics, fragrances)•Home and family care (for example, cooking and kitchenware)•Wellness (for example, weight loss products, vitamins)•Leisure and educational items (for example, books, videos, toys)•

Almost all the 14 million salespeople who work in direct sales are independent agents. They are not employed by thedirectsalesfirmbut,rather,actasindependentdistributors,buyingmerchandisefromthefirmsandthenresellingit to consumers.

4.5 Television Home ShoppingTelevision home shopping is a retail channel in which customers watch a television program that demonstrates merchandise and then place orders for that merchandise, usually by telephone, via Internet, or TV remote. The three forms of TV home shopping retailing are:

Cable channels (dedicated to television shopping)•Infomercials•Direct-response advertising•

Infomercials are programs, normally 30 to 60 minutes long that mix entertainment with product demonstrations and then solicit orders placed by telephone. Direct-response advertising consists of few minutes advertisements on TV and radio. These describe products and provide an opportunity for consumers to order them. The two largest retailers using this channel are HSN and QVC, followed by ShopNBC and Jewelry Television. Although most consumers with cable or satellite television access can patronise a television shopping channel, relatively few watch on a regular basis. Furthermore, most of the purchases are made by a relatively small proportion of viewers. Like catalogues, TV home shopping networks are embracing the Internet; the major home shopping networks all have online operations.

The major advantage of TV home shopping is that customers can see the merchandise demonstrated either on their TV screens or through streaming videos on the Internet. In response to the increase in cooking, decorating, do-it-yourself and other lifestyle programming, home shopping retailers have incorporated more demonstrations into their programming.

Automated retailingAutomated retailing is a retail channel in which merchandise or services are stored in a machine and dispensed to customers when they deposit cash or use a credit card. Automated retailing machines (or vending machines) are typicallyplacedatconvenient,high-trafficlocations,suchasinworkplacesoronuniversitycampuses.Thevastmajority of automated retailing sales are from cold beverages, candy and snacks.


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4.6BenefitsOfferedbytheRetailChannelsByusingacombinationofchannels,multichannelretailerscanleveragethesebenefitsandovercomethelimitationsof each channel to attract and satisfy more customers.

4.6.1 Store ChannelStoresofferseveralbenefitstocustomersthattheycannotgetwhentheyshopthroughnon-storechannelssuchascatalogues or the Internet. Touching and feeling products is the opportunity for customers while examining and evaluating products. New technologies (such as 3D) can enhance representation of product on a computer screen.

Personal service: Although consumers are often critical of the personal service they get in stores, sales associates still have the unique ability to provide meaningful, personalised information. For instance, they can tell customers if a suit looks good on them, suggest a tie to go with a dress shirt, or answer questions customers might have about what is appropriate to wear at a business-casual event.

Risk reduction: The opportunity to touch and feel when evaluating products and to get personalised information increasesthelikelihoodthatconsumerswillbesatisfiedwiththeirpurchases.Also,thephysicalpresenceofthestorereducesperceivedriskandincreasescustomers’confidencethatanyproblemswithapurchasewillbecorrected.Customers can easily access people in the store to resolve issues concerning defective or unsuitable merchandise or to get additional information on how to use a product.

Immediategratification:Customers can get the merchandise immediately after they buy it from stores. Thus, customers do not have to wait a day or two for the delivery of a prescription from Drugstore.com or of a gift from Amazon.com.

Entertainment and social experience: In-store shopping can be a stimulating experience for some people, providing a break in their daily routine and enabling them to interact with friends. All non-store retail formats are limited in the degree to which they can satisfy these entertainment and social needs.

Browsing: Shoppers often have only a general sense of what they want (for example, a sweater, something for dinner,agift)butdonotknowthespecificitemtheywant.Sotheygotoastoretoseewhatisavailablebeforetheydecide what to buy. Although some consumers surf the Web and look through catalogues for ideas, most consumers stillfinditeasiertobrowseinstores.

Cash payment: Stores are the only channel through which consumers can make cash payments. Some customers prefer to pay with cash because it is quicker, resolves the transaction immediately, and does not result in potential interest payments or excessive debt. Other customers are concerned about security and identity theft and thus prefer to use their credit card or debit card in person rather than electronically sending the payment information via the Internet.

4.6.2 Catalogue ChannelThecataloguechannelprovidessomebenefitstocustomerslikesafetyandconveniencethatareassociatedwithall non-store channels. However, catalogues also have some unique convenience advantage over other non-store formats.

Safety: • Security in malls and shopping areas is becoming an important concern for many shoppers, particularly the elderly. Non-store retail channels enable customers to review merchandise and place orders from a safe environment, their home. Convenience: • Catalogues offer the convenience of looking at merchandise and placing an order from almost anywhere for the whole day. However, catalogues are easier to browse through than Web sites. Consumers can refer to the information in a catalogue anytime by simply picking it up from the coffee table. They can take a catalogue to the beach and browse through it without an Internet connection. Finally the information in a catalogue is easily accessible for a long period of time.

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4.6.3 Internet ChannelShopping over the Internet provides the safety and convenience of catalogues and other non-store formats. However, the Internet, compared with store and catalogue channels, also has the potential to offer a greater selection of products and more personalised information about products and services.

Broader and deeper assortmentsOnebenefitoftheInternetchannel,comparedwiththeothertwochannels,isthevastnumberofalternatives that consumers can consider. The number of SKUs (stock keeping units) available in a store is limited by the store’s size. The number of pages in a catalogue limits the number of SKUs that can be viewed in a catalogue channel.

More timely information for evaluating merchandise An important service offered to customers is providing information that helps them make better buying decisions. The retail channels differ in terms of accessible information to the customers. The amount of information available through the store channel is limited by the number of sales associates and the space for signage. Similarly, the information available through a catalogue channel is limited by the number of pages in the catalogue. In contrast, the information provided through the Internet channel is unlimited. The vast amount of information available through the Internet channel enables customers using this channel to solve problems rather than just get information about specificproducts.Inadditiontoprovidingmoreinformation,theInternetchannelofferscustomersmorecurrentinformation whenever they want it.

Finally, consumers can access information from other consumers through the Internet channel; information that may be viewed as less biased than information provided by a retailer or manufacturer. Many retailers provide an opportunity for customers to post reviews of products or services they have bought.

Personalisation DuetotheWeb’sinteractivenature,themostsignificantpotentialbenefitoftheInternetchannelisitsabilitytopersonalise merchandise offerings and information for each customer economically. Customers control some of this personalisation as customers shopping on an Internet channel can move through Web pages until they have enough information to make a purchase decision. Also, when using the Internet channel, customers can format the information so that it can be effectively used when they are comparing alternatives.

The retailer can play a more proactive role in personalising merchandise and information through the Internet channel. For example, many retailers offer live chats. Customers can chat any time and have an instant messaging e-mail or voice conversation with a customer service representative. This technology also enables retailers to send a proactive chat invitation automatically to customers on the site. The timing of these invitations can be based on the timethevisitorhasspentonthesite,thespecificpagethecustomerisviewing,oraproductonwhichthecustomerhasclicked.Forexample,ifavisitorsearchesformorethanthreeitemsinfiveminutes,therebydemonstratingmorethan a passing interest, an internet site can display a pop-up window with a friendly face offering help.

The interactive nature of the Internet also provides an opportunity for retailers to personalise their offerings for each of their customers. For example, Amazon.com serves customers a personalised landing page with information about books and other products based on the customer’s past purchases and search behavior on the Web site. Amazon also sends interested customers customised e-mail messages to notify them that their favourite author or recording artist has published a new book or released a new CD. Another personalisation opportunity is presenting customers with recommendations of complementary merchandise. Just as a well-trained salesperson would make recommendations to customers before checkout, an interactive Web page can make suggestions to shoppers about additional items that they might like to consider.


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Perceived risks in electronic shopping (e-tailing)The two critical perceived risks about buying products by consumers through an electronic channel are:

The security of credit card transactions on the Internet •Potential privacy violations•

Although many consumers remain concerned about credit card security, extensive security problems have been rare. Almost all retailers use sophisticated technologies to encrypt communications. All major credit card companies provide the same consumer protection for transactions through store and Internet channels. Security breaches can ruin a retailer’s reputation and possibly expose it to legal liability.

4.7BenefitsofMultichannelRetailingTypically store-based retailers are using multiple channels to improve their offerings to their customers and build a competitive advantage. Traditional store-based and catalogue retailers are using multiple channels, typically adding andplacingmoreemphasisontheirelectronicchannels,forfivereasons.Theseare:

First, the electronic channel gives retailers an opportunity to overcome the limitations of their primary existing •channel. Second, providing a multichannel offering increases customer satisfaction and loyalty. •Third, an electronic channel enables retailers to gain valuable insights into their customers’ shopping •behavior.Fourth, by using an electronic or catalogue channel, retailers can economically enter new markets.•Fifth, a multichannel offering provides the bases for building a strategic advantage. •

4.8 Overcoming the Limitations of an Existing FormatIn order to overcome the limitations of an existing format, following things should be considered.

Increased assortments Byusingacombinationofchannels,retailerscanbettersatisfytheirconsumers’needsbyexploitingthebenefitsandovercomingthedeficienciesofeachchannel.Forexample,oneofthegreatestconstraintsfacingstore-basedretailers is the size of their stores. However, due to the low cost of computer memory, the number of SKUs presented through an Internet channel is virtually unlimited. In addition, the inventory needed to support each SKU offered is lower in an Internet channel compared to a store channel because the inventory supporting an Internet channel is consolidated in a small number of distribution centers rather than a large number of stores.

By complementing their store channel with an Internet channel accessed from Internet-enabled kiosks, POS terminals, or mobile devices, retailers can dramatically expand the assortment offered to their customers. For example, some retailers may have a limited number of major appliance models in their stores, but customers can use a Web-enabled kiosk to look at an expanded selection of appliances, get more detailed information, and place orders. Thus, an Internet channel enables retailers to keep their overall inventory costs low and still satisfy the demand for less popular styles, colours or sizes.

Low-cost, consistent executionAnother limitation of the store channel is its costly but inconsistent execution. Customers can get personalised information from sales associates in stores. Over time, sales associates can learn what customers like and want. Theycanselectafewoutfitsandmakeanappointmenttoshowtheseoutfitstocustomersoreventaketheoutfitstothecustomer’sofficeorhome.However,customerscangetthisbenefitonlywhenthesalesassociatesarepresent.Also, providing it consistently is costly. Training and retaining knowledgeable sales associates are expensive. This inconsistency is most problematic for retailers selling new, complex merchandise.

Forexample,someconsumerelectronicretailersfinditdifficulttocommunicatethefeaturesandbenefitsofthenewestproducts to all of their sales associates. To address this problem, adding an Internet channel offers an opportunity to provide ‘personal’ service at a low cost.

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Current information Catalogue retailers also use electronic channels to overcome the limitations of their catalogues. Once a catalogue is printed, it cannot be updated economically with the latest price changes and new merchandise. Therefore, Internet site is used to provide customers with real-time information about stock availability and price reductions on clearance merchandise.

4.9 Increasing Customer Satisfaction and LoyaltyIntroducing an electronic channel may lead to some cannibalisation. The customers who formerly made purchases in a retailer’s store now make the same purchases through the retailer’s Internet channel. For example, by focusing on the purpose for which a set of products will be used, store based retailers can offer solution Web sites that stimulate customers to view more products than they otherwise would have considered.

4.10 Gaining Insights into Consumer Shopping BehaviorAnelectronicchannelprovidesvaluableinsightsintohowandwhycustomersshopandaredissatisfiedorsatisfiedwiththeir experiences. This information on how customers shop a store or merchandise category is useful for designing stores or Web sites. For example, after a customer purchases a book, Amazon.com recommends additional books that might be of interest to the customer based on purchases made by other customers who have bought that book. Collecting data on how customers navigate through a Web site is quite easy. By placing a cookie (a small computer program that collects information about computer usage) on a customer’s hard drive, the retailer can monitor each mouse click. The click-stream data can provide insights into what characteristics of products customers considered and what products customers looked at but did not buy. To collect this information from store or catalogue shoppers wouldbequitedifficult; someonewouldhave to follow themaround thestoreorobserve themgoing throughcatalogue pages. The search data are useful for determining whether a store or Web site should be laid out by brands, size, color, or price point.

4.11 Expanding Market PresenceThe market for store-based retailers is typically limited to consumers living in close proximity to the retailer’s stores. By adding the Internet channel, retailers can expand their market without having to build new stores. Adding an electronic channel is particularly attractive to retailers with strong brand names but limited locations and distribution.

4.12 Building a Strategic AdvantageMultichannel retailers have the opportunity to develop a strategic advantage over single-channel competitors. Two strategic resources that multichannel retailers have and that are not easily detected or duplicated by store-based, single-channel competitors are:

Propriety information about customer purchase history and • shopping behavior Unique ‘how-to’ knowledge about coordinating operational activities across channels•

Itisdifficultformoststore-basedretailerstodevelopextensivepurchasehistoriesoftheircustomersbecausetheretailers are unable to link transactions to customers who pay cash or use third-party credit cards. In contrast, all transactionsthroughtheInternetandcataloguechannelshavethecustomeridentificationinformationneededtosend the product to the customer. In addition, the Internet channel offers the opportunity to collect search-behavior as well as transaction data. Therefore, multichannel retailers have a greater opportunity to develop extensive, proprietary information about their customers and can use this information to more effectively target their offerings and marketing activities. Another strategic resource possessed by effective multichannel retailers is the knowledge associated with integrating multiple channels. Customers want the retailers they patronise to recognise them no matter which channel they use. Knowing how to synergistically coordinate these different channels provides retailers with a strategic advantage.


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SummaryA retail channel is the way a retailer sells and delivers merchandise and services to its customers.•Retailers also use a variety of non-store channels including the Internet, catalogues and direct mail, direct selling, •television home shopping, and automated retailing.Internet retailing, also called online retailing, electronic retailing and e-tailing, is a retail channel in which the •offering of products and services for sale is communicated to customers over the Internet.The catalogue channel is a non-store retail channel in which the retail offering is communicated to customers •through a catalogue mailed to customers.Direct selling is a retail channel in which salespeople interact with customers face-to-face in a convenient •location, either at the customer’s home or at work.Direct selling is a highly interactive retail channel in which considerable information is conveyed to customers •through face-to-face discussions.Television home shopping is a retail channel in which customers watch a television program that demonstrates •merchandise and then place orders for that merchandise, usually by telephone, via Internet, or TV remote.Infomercials are programs, normally 30 to 60 minutes long that mix entertainment with product demonstrations •and then solicit orders placed by telephone.Automated retailing is a retail channel in which merchandise or services are stored in a machine and dispensed •to customers when they deposit cash or use a credit card.Thecataloguechannelprovidessomebenefitstocustomerslikesafetyandconveniencethatareassociatedwith•all non-store channels.Shopping over the Internet provides the safety and convenience of catalogues and other non-store formats.•The number of SKUs (stock keeping units) available in a store is limited by the store’s size.•An important service offered to customers is providing information that helps them make better buying •decisions.The retailer can play a more proactive role in personalising merchandise and information through the Internet •channel.Security breaches can ruin a retailer’s reputation and possibly expose it to legal liability.•Typically store-based retailers are using multiple channels to improve their offerings to their customers and •build a competitive advantage.Byusingacombinationofchannels,retailerscanbettersatisfytheirconsumers’needsbyexploitingthebenefits•andovercomingthedeficienciesofeachchannel.Anelectronicchannelprovidesvaluable insights intohowandwhycustomersshopandaredissatisfiedor•satisfiedwiththeirexperiences.Multichannel retailers have the opportunity to develop a strategic advantage over single-channel competitors.•

ReferencesVarley, R., 2006. • Retail Product Management: Buying and Merchandising, 2nd ed., Rouledge.Ray, 2009. • Supply Chain Management for Retailing, Tata McGraw-Hill Education.Chapter 6 Web, Nonstore-Based, And Otherforms of Nontraditional Retailing • [pdf] Available at: <http://wps.pearsoncustom.com/wps/media/objects/2471/2530883/MCH120_Ch06.pdf> [Accessed 23 April 2012].davidhall60, • Multi-channel retailing [Online] Available at: <http://www.youtube.com/watch?v=O9_ro6f8qso> [Accessed 23 April 2012].arifirfanullah,2011.• Multi-Channel Retail Strategy: What Makes Consumers Tick? [Video Online] Available at: <http://www.youtube.com/watch?v=4VIgjCtNpPQ> [Accessed 23 April 2012].hannebjorn, 2011. • 21st Century Multi Channel Retail [Video Online] Available at: <http://www.youtube.com/watch?v=FNncMO9lIqY> [Accessed 23 April 2012].

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Recommended ReadingBerman, 2007. • Retail Management: A Strategic Approach, 10/E, Pearson Education India. Krafft, M. Murali K. & Mantrala, M., 2010. • Retailing in the 21st Century: Current and Future Trends, Springer.Grewal, 2011. M• arketing, Tata McGraw-Hill Education.


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Self AssessmentA retail channel is the way a retailer sells and delivers merchandise and services to _______.1.

customersa. producersb. manufacturersc. salesmend.

_________is a retail channel in which salespeople interacts with customers face-to-face in a convenient location, 2. either at the customer’s home or at work.

Direct sellinga. Catalogue channelb. Internet channelc. Television home shoppingd.

_________is a retail channel in which merchandise or services are stored in a machine and dispensed to customers 3. when they deposit cash or use a credit card.

Direct sellinga. Automated retailingb. e-tailingc. Television home shoppingd.

The most common channel used by retailers is _________.4. storea. catalogueb. internetc. magazined.

Whichoftheseisnotabenefitofferedbyinternetchannel?5. Broader and deeper assortmentsa. Personalisation b. More timely information for evaluating merchandise c. Risk reductiond.

Which is becoming an important concern for many shoppers, particularly the elderly in malls and shopping 6. areas?

Securitya. Convenienceb. Browsingc. Personal serviced.

Internet retailing is not called ______________-.7. Online retailinga. Electronic retailingb. e-tailingc. catalogue retailingd.

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Which of the following statements is false?8. Thedirectchannelprovidessomebenefitstocustomerslikesafetyandconveniencethatareassociatedwitha. all non-store channels.Shopping over the Internet provides the safety and convenience of catalogues and other non-store b. formats.The number of SKUs (stock keeping units) available in a store is limited by the store’s size.c. An important service offered to customers is providing information that helps them make better buying d. decisions.

Which of the following statements is false?9. Typically non-store-based retailers are using multiple channels to improve their offerings to their customers a. and build a competitive advantage.By using a combination of channels, retailers can better satisfy their consumers’ needs by exploiting the b. benefitsandovercomingthedeficienciesofeachchannel.Anelectronicchannelprovidesvaluableinsightsintohowandwhycustomersshopandaredissatisfiedorc. satisfiedwiththeirexperiences.Multichannel retailers have the opportunity to develop a strategic advantage over single-channel d. competitors.

The vast majority of automated retailing sales are not from ________.10. cold beveragesa. candy b. snacksc. jewelleryd.


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Chapter V

Retail Design

Aim


definesignage•

describe outlet design•

explain the process of formulating a store design•

Objectives


describe retail signage•

elucidate the types of signage•

state the • usage of signage

Learning outcome


defineplanograms•

describe the store entrance design•

enlist the • prime locations for merchandise

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5.1 IntroductionThe amount of analysis and planning that goes into retail product management might seem vast. However, a retailer should never lose sight of the fact that each customer has their own personal encounters with a retail outlet and the products within. In retail markets where shoppers have choice of outlet for similar goods, the decision to patronise one retailer over another may be entirely based on the appearance and ambience of the outlet.

5.2 Outlet DesignThe management of the physical product and its relationship with the physical elements within the store, or the designed element within a non-store outlet, is as important as any other part of the product management process. If product range and outlet work in harmony, the retailer’s positioning strategy is toughened. But if they work in conflict,thepositioningwillbeuncleartocustomers,whogetconfusedanddisappointed.Whileusingtheterm‘outlet’ design, all types of retailers are included:

Large and small stores•Electronic retailers•Paper-based mail order retailers•

Catalogue and web site design can have an equally vital role to play as store design. However, store based retailers are able to maximise the opportunity to use design to create vibrant spaces where consumers can interact with real products.

5.3 Formulating a Store DesignWhen a store owner or manager buys or rents a retail outlet, he is essentially faced with an empty shell, such as a flat.Theremaybesomeinteriordecorationorsomestructuralworkthatisnecessarytomakethestoreoperational.For example, the shop windows may need to be enlarged, or if it is a clothing outlet changing rooms may need to bebuilt,oraliftmayneedtobeinstalledifthestorehasmorethanonefloor.Thearchitecturalfeaturesofastorehave to be considered very carefully. This may be because they may be subject to planning restrictions and could be creatively incorporated into a design to provide originality and distinctiveness.

The interior of a building is essentially a collection of materials, colours and space. In retail store, materials have to berobustinordertowithstandcustomertraffic,andcolourshavetobechosensothattheydonotdetractfromthemerchandise, but still blend into overall design. Retail designs, such as products, are subject to trends and themes. For example, clean, bright, uncluttered designs have been popular, with a move towards colour blocking and softer shapes and curves.

5.4 MaterialsRetail outlets are public places to a large extent, and so they need to send messages out to the general public which will be received and understood by the type of customer a retailer wishes to attract. That section of the public may be large.Itmaybemoreimportantforasuperstorenottoputoffanyparticularcustomergroupratherthanspecificallytrytoattractaparticulartype.Ontheotherhand,targetcustomersmaybemorenarrowlydefined,inwhichcasethe interior decoration of the store can go a long way. Decisions regarding the type of material to be used depend on the following.

The type of product being sold: For food retailing, the materials should be easy to clean, such as ceramic and marbletiling.Inajewellerystore,plushcarpetflooringmayhelptocreatealuxuriousandintimateatmosphere.

The cost involved: Some materials are very expensive and, whilst investing in good quality materials is often worthwhile for mainstream retailing, a discount store would send confused messages if the interior decoration looked too expensive. Something robust and basic, such as textured plastic, is a more suitable choice.


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Thestoretraffic:A busy store, such as a supermarket where customers are likely to be visiting in their work boots, needs to use material that will withstand wear and tear. Even though a substantial entrance mat is essential in any store, theflooringmustnotbecomeslipperywhendamp,anditmustbeeasytoclean.Foreasymaintenance,departmentstores incorporate wood block or tiling into the main walkways and restrict the use of carpets to the departmental displayarea.Theotheradvantageofchangingthetypeofflooringisthatitcanencouragecustomerstoaltertheirpace around the store; moving faster on hard surfaces and slowing down in carpeted areas.

Fashion: Stores selling fashion-orientated merchandise must keep up with fashions in interior decoration in order to maintain a modern image. The problem is that the more fashion orientated the look of the store, the faster it is likely to look out of date; therefore, fashion retailers have to accept that frequent refurbishments will be part of the retail strategy. That being the case, these retailers are able to be more experimental with materials and not be so concerned with longevity.

Environmental and safety concerns: Materials should be in keeping with a retailer’s desired image. If a retailer professes to be concerned with environmental issues, then natural materials (from sustainable sources) are more likely to be in tune with their overall store design. Retailers also have to conform to health and safety regulations. For example, glass has become very popular in retail architecture, but of course it has to be of a type that will not be dangerous to the public.

5.5 SignageMost communication process within a store relies on visual cues rather than the written word. However, there may be messages for customers that are so important that they have to be spelt out. Visual content is delivered digitally throughacentrallymanagedandcontrollednetworkanddisplayedonaTVmonitororflatpanelscreen.

Superior in attracting attention•Enhances store environment•Provides appealing atmosphere•Overcomes time-to-message hurdle•Messages can target demographics•Eliminates costs with printing, distribution and installing traditional signage•

Retail signage can be broadly broken down into four types:In large stores, s• ignage is required to help customers locate the merchandise they are looking for. Therefore, signage needs to be incorporated in the general store layout to guide customers to the different departments, aisles or service areas and to prevent them getting lost. These signs need to be large, clear and consistent in their appearance so that they make a contribution to the overall store image. Another type of corporate sign is that which • relays messages about a retailer’s overall organisational policy. An example of this would be the returns policy for clothing or a policy on sourcing of food products. These signs need to be placed in relevant positions such as near to the merchandise in question, near to the till area, or at the customer service desk.Once customers have located a department or product category of interest, • signage can help to guide shoppers through the merchandise. Signs indicating different brands, sizes, prices and special product features are useful to help customers in their shopping tasks.The fourth type of signage is that which • is related to promotional activity and this can extend from banners and window posters, through to shelf-edge price offers.

Different types of signage used in terms of size, lettering, and colours all have to be incorporated into the overall store design. Illuminated signage, either by spot lighting or by using lit-up panels means that smaller signage is not necessarily less noticeable than large. Liquid display screens are being used more frequently in retail outlets as the costofusingthosefalls.Theseprovideflexibilityinthemessagebeingrelayedandtheaddedbenefitofmovingimagery or message.

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More information can be included than on a static sign and a customer’s attention can be grabbed more effectively. The signage used in the store, like any other aspect of the design should complement rather than compete with the merchandise. A retailer generally has to strive for a balance between giving customers the information they require and preventing the store looking too cluttered. Thus, usage of signage includes:

Location:• identifiesthelocationofmerchandiseandguidescustomersCategory signage:• identifiestypesofproductsandlocatednearthegoodsPromotional signage:• relatestospecificoffers;sometimesinwindowsPoint of sale:• near merchandise with prices and product informationLifestyle images:• creates moods that encourage customers to shop

5.6 Store Design and the Corporate ImageIt is able to become intimated with retail businesses in a way that is not feasible with manufacturing businesses. This interface between the business and the customer is what gives retailers their advantage, as well as many of their problems. Most of the largest retailers around the world have become part of everyday life to people and the relationship between stores and individuals is something that retailers are keen to strengthen in pursuit of customer loyalty. So, maintaining a favourable corporate image is vitally important in competitive retail sectors.

Retailers work day and night to keep their image favourable in the mind of the consumer; and although the formation of an image incorporates many more components than purely physical ones, the store and its environment play a big part in the formation and maintenance of a corporate image. Retailers that do not update their stores on a regular basis run the risk of appearing out of touch with the customer, and if a refurbishment programme is left for too long, the change required to modernise the store may be so extensive that the retailer runs the risk of alienating the customers who are left.

5.7 The Exterior DesignThe exterior of the shop has to communicate to the potential customer what that retailer stands for. The main external features of a retail outlet are:

The fascia•The window display •The entrance•

The fascia is the most visible part of a retail brand. It is the name of the retailer, but it is also the logo, the graphics and the colours that are incorporated into whatever appears over a shop’s entrance. The fascia may incorporate exterior lighting to highlight the name, and it may incorporate a company logo or character. Whatever the fascia includes, it becomes a key feature of the retail identity, which is then locked into the overall impression that a customer builds up about a store.

The store entranceThe ways in which customers gain access to stores have to satisfy both functional and aesthetic criteria. The opening to a store has to be accessible to all customers, including those using wheelchairs and buggies, and it has to be secured when the shop is closed. A very wide opening may be very welcoming for customers, but this type of entrance is problematic from a store security point of view, it does not offer much protection from the weather, and it does not allow the retailer to construct window displays.

The open entrance is inviting and accessible, and breaks down the barrier between the store and its exterior. However, open entrances can feel anonymous and do not help to establish a retailer’s identity. One way round this is to use a semi-open entrance, where accessibility is still good, but a window display can be created. Open entrances are often found in enclosed shopping centres, where the shop is protected from the outside elements.


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The funnel, recessed or lobby entrance increases the proportion of window display space and invites shoppers into the retail space without the commitment of stepping over the threshold. A standard doorway gives a more exclusive feel to the retailer, and the window display stands out to communicate the retailer’s offer. A problem with the standard entrance is access, which may be overcome by using an automatic door. Awnings or canopies, which originated in order to shade merchandise in store windows, are now often used to give emphasis to a store entrance.

The contribution that window displays make to the external design of the store has traditionally been a very important one. Window displays as part of the visual merchandising function. There are some retailers who do not use window displays at all. In this case the retailer relies on their name and reputation to draw customers into the store, as opposed to the visual product offer. Many retailers who use the superstore or category killer format do not use window displays. It is thus very important for this type of retailer to use a store brand name that gives an indication of the type of product that is on offer. Retailers who do not use brands that are linked to the product offer have to rely on their reputation and other communication tools to interest the customer base.

Fig. 5.1 The open entrance to a John Lewis store(Source:http://www.guardian.co.uk/business/2010/sep/16/john-lewis-kingfisher-profits)

5.8 Considerations for Merchandise LocationsThe prime locations for merchandise include:

Highlytraffickedareas•Store entrances �Near checkout counter �

Highly visible areas•End aisle �Displays �

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Fig. 5.2 Percentage of shoppers visiting different areas of the store(Source: http://www.cerritos.edu/blivingston/ba123/ppt/Chap018.pdf)

5.9 Location of Merchandise within a Category: The Use of PlanogramsSupermarkets and drug stores place private-label brands to the right of national brands; shoppers read from left to right(higherpricednationalbrandsfirstandseethelower-pricedprivate-labelitem).

PlanogramPlanogramisamarketingtoolusedinretailstores.ItisadiagramshowinghowandwherespecificSKUsshouldbeplacedonretailselvesordisplaystoincreasecustomerpurchases.Theseschematicspresentaflowchartforthe particular merchandise departments within a store layout and show on which aisle and on what shelf an item is located. It is a diagram or drawing that provides details as to where a product should be placed on a shelf and how many faces that product should hold. It is used by the store to increase sales and by suppliers to justify space allocated to brands and new product development.

The function of the planogram includes:The purpose of the planogram is to increase sales and give the most popular product the best position to attract •buyers. Storesroutinelychangethelayoutofallthefixtures.Forexample,thedesignofthelaundrydetergentsection•in a supermarket will be different every few months depending on what is hot and what is in season. The stores use a planogram to decide how the section will look and what products will be most accessible to •the customer. Furthermore,witheachdesignofaplanogram,thestorewillmakeafixtureslookmoreaestheticallyappealing•to the customer.

The features of the planogram include:Planograms include shelf heights, product placements and the amount of facings. Shelf heights depend on the •size of the products and ease of reach for the client. Product placement describes on which shelf and where on that shelf a product should be placed. •A facing is a row of products. Thus, if a product has two facings, there are two rows of that product on the •shelf.


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Thekeybenefitsofplanograminclude:Assigned selling potential to every inch of retail space•Assured product placement•Improved sales•Satisfying customers with a better visual appeal•Tighter inventory control & reduction of out-of- stocks•Easier product replenishment•Effective communication tool for staff-produced displays•

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SummaryCatalogue and web site design can have an equally vital role to play as store design.•Most communication process within a store relies on visual cues rather than the written word.•Visual content is delivered digitally through a centrally managed and controlled network and displayed on a •TVmonitororflatpanelscreen.In large stores, signage is required to help customers locate the merchandise they are looking for.•Signs indicating different brands, sizes, prices and special product features are useful to help customers in their •shopping tasks.Different types of signage used in terms of size, lettering, and colours all have to be incorporated into the overall •store design.Liquid display screens are being used more frequently in retail outlets as the cost of using those falls. These •provideflexibilityinthemessagebeingrelayedandtheaddedbenefitofmovingimageryormessage.The signage used in the store, like any other aspect of the design should complement rather than compete with •the merchandise.The fascia is the most visible part of a retail brand. It is the name of the retailer, but it is also the logo, the •graphics and the colours that are incorporated into whatever appears over a shop’s entrance.The fascia may incorporate exterior lighting to highlight the name, and it may incorporate a company logo or •character.The opening to a store has to be accessible to all customers, including those using wheelchairs and buggies, and •it has to be secured when the shop is closed.The open entrance is inviting and accessible, and breaks down the barrier between the store and its exterior.•The funnel, recessed or lobby entrance increases the proportion of window display space and invites shoppers •into the retail space without the commitment of stepping over the threshold. A standard doorway gives a more exclusive feel to the retailer, and the window display stands out to communicate •the retailer’s offer.Planogram is a marketing tool used in retail stores.•The purpose of the planogram is to increase sales and give the most popular product the best position to attract •buyers. Planograms include shelf heights, product placements and the amount of facings. Shelf heights depend on the •size of the products and ease of reach for the client.


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ReferencesVarley, R., 2006. • Retail Product Management: Buying and Merchandising, 2nd ed., Routledge.Sharma, M., 2009. • Product Management: Product Lifecycles & Competitive Marketing Strateg, Global India Publications.McGraw-Hill/Irwin, • Store Layout, Design, and Visual Merchandising [pdf] Available at: <http://www.cerritos.edu/blivingston/ba123/ppt/Chap018.pdf > [Accessed 23 April 2012].thegaurdian, • John Lewis and Kingfisher show profits, but not optimism [Online] Available at: <http://www.guardian.co.uk/business/2010/sep/16/john-lewis-kingfisher-profits>[Accessed23April2012].craigbur1, 2009.• Content for Digital Signage - Quick Service Restaurant Menu Board [Video Online] Available at: < http://www.youtube.com/watch?v=59hdDOCMw-0&feature=related> [Accessed 23 April 2012].bluesphereav, 2010. • Digital Menu Board Sample Layouts Digital Signage System Blue sphere [Video Online] Available at: <http://www.youtube.com/watch?v=mYTEMIcTrT4&feature=related> [Accessed 23 April 2012].

Recommended ReadingMadaan, 2009. • Fundamentals of Retailing, Tata McGraw-Hill Education. Levy, M. & Weitz, B. A., 2008. • Retailing Management, McGraw-Hill Irwin.Ebster, C. & Garaus, M., 2011. • Store Design and Visual Merchandising: Creating Store Space That Encourages Buying, Business Expert Press.

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Self AssessmentIn large stores, _________is required to help customers locate the merchandise they are looking for.1.

signagea. musicb. categoryc. numberingd.

Whatidentifiesthetypesofproductsandlocatednearthegoods?2. Locationa. Category signageb. Promotional signagec. Lifestyle imagesd.

What creates moods that encourage customers to shop?3. Locationa. Category signageb. Promotional signagec. Lifestyle imagesd.

Which of these is not the main external feature of a retail outlet?4. The fasciaa. The window display b. The entrancec. The exitd.

The ________is inviting and accessible, and breaks down the barrier between the store and its exterior. 5. open entrancea. semi-open entranceb. lobby entrancec. canopiesd.

What6. increases the proportion of window display space and invites shoppers into the retail space without the commitment of stepping over the threshold?

open entrancea. semi-open entranceb. lobby entrancec. canopiesd.

A _______gives a more exclusive feel to the retailer, and the window display stands out to communicate the 7. retailer’s offer.

semi-open entrancea. lobby entranceb. canopiesc. standard doorwayd.


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________originated in order to shade merchandise in store windows, are now often used to give emphasis to 8. a store entrance.

Semi-open entrancea. Lobby entranceb. Canopiesc. Standard doorwayd.

Which of the following statements is false?9. Planogram is a manufacturing tool used in retail stores.a. PlanogramisadiagramshowinghowandwherespecificSKUsshouldbeplacedonretailselvesordisplaysb. to increase customer purchases. Planogram is a diagram or drawing that provides details as to where a product should be placed on a shelf c. and how many faces that product should hold. Planogram is used by the store to increase sales and by suppliers to justify space allocated to brands and d. new product development.

Which of the following statements is false?10. Catalogue and web site design can have an equally vital role to play as store design.a. Most communication process within a store relies on visual cues rather than the written word.b. Visual content is delivered digitally through a centrally managed and controlled network and displayed on c. aTVmonitororflatpanelscreen.In family-run stores, signage is required to help customers locate the merchandise they are looking for.d.

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Chapter VI

Category Management

Aim


definecategory•

describe category management•

state the key assumptions of category management•

Objectives


describe category captain•

elucidate ECR framework•

explain space planning•

Learning outcome


defineefficientconsumerresponse•

describethefiveenablingtechnologiesofECRframework•

explain the category management process•


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6.1 Category ManagementAcategoryisagroupofsimilarorrelateditemswhichthecustomerwouldideallyliketofindtogetherinastore.Categoriesaremainlyusedasorganisationalhelpstobettermanageandmonitorpredefinedgroupsofproducts.

Fig. 6.1 Category managementCategorymanagementisdefinedasthestrategicmanagementofproductgroupsthroughtradepartnerships,whoseobjectiveistomaximisesalesandprofitsbysatisfyingconsumerneeds.Withinthisdefinition,keywordspointtothe difference between category management and other buying approaches.

A category is a strategically managed product group: Rather than products being grouped by departments, into which they are placed according to operational convenience, products are put into groups that are carefully definedaccordingtoconsumershoppingbehaviour.Allproductswithinacategorycanbemanagedusingastrategy,specificallyformulatedforthatgroupofproducts.

Category management relies on trade partnerships: In category management, suppliers play active role in the management of the product group. Suppliers become partners of the retailer using category management, and the two parties work together in pursuit of mutual goals.

Categorymanagementaims tomaximise sales andprofits:Thedefinitionhighlights the importanceof theperformanceoftheproductgroup(salesandprofits),butbylinkingthisperformancetoconsumersatisfaction,thedefinitionindicatesthatlong-termperformanceobjectivescanonlybereachedifconsumerneeds,bothforproductsand in the shopping process, are met. Performance refers to that of the product group, as opposed to that of each single product item. A category may include a number of leading manufacturers’ brands, retailers’ own brands andsomespecialityproducts,allofwhichhavetheirownspecificsalesvaluesandprofitmargins.However,fromthe retailer’s point of view, the performance of the whole category and its contribution to the company’s overall profitabilityisimportant.

Categorymanagementsatisfiesconsumerneeds: Category management is a consumer-led process, and only by havingadeepunderstandingofconsumerneedsandprovidingaproductassortmentthatfullysatisfieseachshopperas they interact with a product category, performance can be maximised in the long term. Category management relies on having an understanding of a consumer’s relationship with a product type, for example, the interest level

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theyhaveinaproductcategory,howtheyprefertoshop,andhowdifferentshoppingoccasionsmayinfluencethedecisions they make about buying products within a category.

The goal of category management is to improve the operating results of a retailer and its associate partners, including manufacturers, distributors and brokers, by focusing on the consumer. Products are more than just goods being sold. They play an important strategic role as a category or its part. Through the category management approach, a group ofspecificproductsaretreatedasastrategicbusinessunit.

A category is a distinct and manageable grouping of products that consumers perceive as interrelated and possibly interchangeable in meeting their needs. Under this premise, category management has some key assumptions:

The process involves many interrelated activities.•Theprocessmustbeflexibleinordertofitparticularcompaniesandsituations.•The process reaches beyond the retailer to include its partner manufacturers, distributors, wholesalers and •brokers.Reducing costs is not the end goal. Goals should focus on the consumer while improving results and simultaneously •improving the relationships between trading and servicing partners.A solid infrastructure including people, process, information systems and measurement tools is necessary to •attain goals.

Fig. 6.2 Required infrastructure(Source: http://www.ups-scs.com/solutions/white_papers/wp_category_mgt.pdf)

6.2CategoryManagementandEfficientConsumerResponse(ECR)Category management is a way of organising buying and merchandising activities to make product ranges work hard for both retailer and customer. The product range should be responsive to customer demand. Being truly responsive to the consumer, however, requires not only the retailer’s buying organisation to become responsive, but also the whole of the retailer’s supply chain. Ultimately, rapid response to consumer buying patterns relies on all activities that are involved in getting produce from factories to customers.

Category managers may be alert to the performances of their product ranges, but if they are not able to rely on suppliers of goods within those categories to respond quickly, then the contributions of the category to organisational success will diminish. Thus, category management is usually part of a broader consumer-led approach within a retailer’s supply chain, which encompasses buying activities, promotional activities and product development, replenishment systems, logistics operations, suppliers and their manufacturing facilities.


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Efficientconsumerresponse(ECR)describesthistypeofall-encompassingsupplychainmanagementsystem.Itisamanagerial approach that starts with consumer demand, and then gears the whole of the supply chain to responding to that demand. It is a customer driven, manufacturing schedules’. ECR involves not only all the operational areas of retail management, but also involves the way in which retailers, suppliers and third-party service suppliers (such as logistics) work together to achieve two fundamental objectives simultaneously; maximising customer satisfaction and minimising total costs.

ECR as a concept emerged in the US in the late 1980s as retailers, particularly in the grocery sector, faced increasing price competition from discounters. In order to avoid a downward spiralling price orientation, battle between suppliers andretailers,allcompetingforanincreasedshareofdiminishingprofitmargins,anewphilosophyemergedwhichpromotedtheideaofretailersandtheirsuppliersestablishingmutuallybeneficial,co-operative,cost-cuttingworkingpractices,withthecriticalsuccessfactoroffinalcustomersatisfactionasthedriverofallinitiatives.Theestablishmentof a group of products as a category, which essentially have similar demand patterns, are reasonable substitutes for one another and can be viewed from a marketing viewpoint as a sensible strategic business unit on which to base a marketing plan, has been an important contribution to the successful implementation of ECR programmes. ECR manages the goods supply through the retail supply chain according to their demand by consumers.

ECR frameworkECR framework as been divided into four strategic development areas:

Efficientstoreassortment:Efficientstoreassortmenttargetsthedevelopmentofvariousgroupingsofproductsandservicesthatareprofitableandsatisfyconsumerneeds.Thegoalistoutilisestoreshelfspacemoreefficiently,appealtotheconsumerandeliminatestock-outs.Pointofsales(POS)dataiscriticaltoefficientstoreassortment.Real-time consumer preferences are gathered at the cash register and fed back to the category and assortment analysis in order to select and optimally place products on store shelves.

Efficientproductintroduction:Efficientproductintroductionfocusesonefficientandeffectivelaunchesofnewproducts based on the needs of consumers. Manufacturers primarily concentrate on reducing the number of failures in new-product introductions and associated costs. The next goal is to react more dynamically with better data and information related to the supply chain. Only value-added products are placed on the shelf based on consumer demand.

Efficientproductpromotion:Efficient product promotiondealswith the efficient and effective executionofpromotion strategies having a tremendous impact on the supply chain. Product promotion takes the form of trade promotion, consumer promotion and consumer advertising. Promotion is focused on a particular category and involves:

Consumer advertising: radio, TV, newspaper, magazine, Internet advertising, etc.•Consumer promotion: special offers and premiums through gifts and coupons•Trade promotion: between the manufacturer and retailer involving deals, offers, special discounts, etc.•

Efficientproductreplenishment:Streamline the replenishment system so that products, their amount, location anddeliverywouldbeasrightandefficientaspossible.

Besides four strategic focus areas, ECR framework includes two key processes: Category Management (CM) and ContinuousReplenishmentProgram(CRP).CRPisdefinedasthepracticeofpartneringamongdistributionchannelmembers that changes the traditional replenishment process from distributor-generated purchase order to one based on actual or forecast consumer demand.

ECRframeworkincludesfiveenablingtechnologies:Barcodes and scanners: Use of these technologies is essential for any ECR initiative as they enable the fast collection and use of product data. Barcodes and scanners’ use is a fundamental element for ECR implementation in the grocery industry as it allows accurate and faster information capture to be obtained. This in turn can be shared with trading partners.

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Electronic data interchange (EDI): EDI refers to technology enabling the interchange of different business documents from purchase orders to invoices. EDI is an inter-organisational exchange of business documentation in a structured, machine-processable form. Besides purchase orders and invoices, another common business document exchanged electronically in the grocery industry is the Advance Shipping Notice (ASN). ASN is the EDI message which precedes the arrival of pallets at their destination.

Computer-aided ordering (CAO): An automatic system which observes inventory levels and makes necessary adjustments when required is called computer-aided ordering. CAO is a retail-based system that automatically generates orders for replenishment when the inventory level drops below a pre-determined reorder level. The system keeps track of the inventory levels of all items in the store and makes necessary adjustments when sales or replenishments occur.

Cross-docking/direct store delivery: Direct delivery from supplier factory/warehouse to retailer premises that minimisestheneedforwholesaleandwarehousing.Itisadirectflowofmerchandiseorproductfromreceivingtoshipping, thus eliminating additional handling and storage steps in the distribution cycle.Activity-based costing:Acostingtoolisusedtobetterunderstandthedifferentcostsandprofits.Activity-basedcosting is a new costing tool which works on the principle that activities are what really affect costs. ABC offers a betterunderstandingofhowprofitsaregenerated,asitincreasesthevisibilityofcostsinaparticularenvironment.It can be used to gain top management commitment and leadership to support the implementation of ECR and its key elements.

Fig. 6.3 ECR factors and relationship(Source:http://hsepubl.lib.hse.fi/FI/ethesis/pdf/12203/hse_ethesis_12203.pdf)


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6.3 Category CaptainSome retailers select a vendor to help them manage a particular category. The vendor, known as the category captain , works with the retailer to develop a better understanding of shopping behavior, create assortments that satisfy consumerneedsandimprovetheprofitabilityofthemerchandisecategory.Thus,thesupplierswhotakeonamajorrole in the category management process are often referred to as category champions or category captains; whilst they are expected to be able to accept the presence of other suppliers and their contribution to the overall success of the category from the consumer (and retailer’s) point of view, they have a major interest in the category and its performance as a whole because their own success is dependent upon it.

Selecting vendors as category captains has its advantages for retailers. It makes merchandise management tasks easierandcanincreaseprofits.Vendorsareinabetterpositiontomanageacategorythanareretailersbecausetheyhavesuperiorinformationbecauseoftheirfocusonaspecificcategory.Also,theyhaveacquiredinsightsfrommanaging the category for other retailers. Many category champions produce assortment plans or planograms for retailers that include all products within a category, whether they are their own, another supplier’s brand or the retailer’s own-branded products.

6.4 Category Management ProcessCategory management is a step-by-step planning and implementation process that helps retailers and suppliers achieve both performance-based objectives and longer-term strategic aims. The category management process broadly consists of three steps:

Fig. 6.4 Category management process

CategorydefinitionDefinethecategory:• Determine the products that make up the category from a consumer’s perspective. Consider the role of sub-categories or individual SKU’s taken in the categoryEstablish the strategic role of the category within the total product assortment of the retailer:• Develop a strategic plan for the category, considering long-term trends

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Category planningEstablish the measures upon which category performance will be assessed:• Determine the way in which the performanceofacategorywillbeevaluated.Considervariouscostingandprofitabilityapproachesandincludeboth quantitative and qualitative assessments.Formulate a strategy for the category: • Develop a marketing and supply development plan to achieve both short-term and long-term category objectives.Establish the category marketing mix:• Determine the various tactics to be used within the marketing and supply plan, e.g. space allocation, promotions.

Category management implementationEstablish category management:• Assign responsibilities for category management implementation within both retailer and supply partner organisations.Category review:• Measure, monitor and modify the category.

6.4.3DefinitionofaCategoryCategorydefiningisthefirststepofcategorymanagementprocess,inwhichtheretailerdefinesthecategorybyassigningrangeofproductstoit.Categoriesareoftendefinedthroughconsumerusageandpurchasehabitsandideallyall products in a store are included in some category. Generally, products within a category should be reasonable substitutesforoneanother(differencesbeingforgedbycriteriasuchasbrand,flavourorcolourvariation,productquality and price level), although products within some categories might have an element of being complementary to one another. For example, some grocers might consider ‘exotic foods’ as a category, into which products such as refried beans, taco shells and salsa sauce might all fall; these are complementary rather than substitute products, but in the purchase of such products, it is more logical for consumers if they are displayed together.

Thedefinitionofacategorychangesbetweenretailers,accordingtothesizeanddegreeofspecialisationintheformat used. Some categories may have recognisable sub-categories, which may become categories in their own right within a specialist retailer; for example, a ‘hair-care’ category might be broken down into sub-categories of shampoo, conditioner, two-in-one conditioners and styling products. Product management is increasingly about providing ‘solutions’ to lifestyles or personal process domains. Thus, complementary goods that work together to providethosesolutionsaremorelikelytodefinearetailcategory.

The role of the SKU within the product categoryWhen a retail product manager is reviewing the choice within a product category, the individual roles that are played by the different brands or product variations will be acknowledged. Some products within a category are ‘trafficbuilders’,generatinghighsalesandhavealargemarketshare;theydrawcustomersintothestore,andtheirabsence would risk customer loss. Other products, such as own-label goods, have roles that are clearly concerned withachievingsalesorprofitobjectives.Somestockkeepingunits(SKUs)createexcitementorplayakeyroleinthe reinforcement of the retail brand image and some products play roles that are directly confrontational with other membersofthecategory,forexample,anown-brandedproductthatfightsformarketsharewithabrandleader,ora low price own-label variant of a frequently purchased item, that defends retail market share and promotes store loyalty. Each SKU member of the category should be making an individual contribution to the performance of the category. If a brand or variation does not have a clear role, then a product management decision may need to be taken.

Couldonebrandbedeletedandthesalessuccessfullytransferredtoanother,moreprofitablebrand.•Does the category include enough excitement generators? •If the category falls within a growing market, can interest be increased and sales within the whole category •further improved by offering more variations of excitement generating products? Do we need three different pack sizes of one product item; would sales be harmed if we only offered the smallest •and largest?


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6.4.2 The Strategic Role of the CategoryA purpose is assigned to the category in relation to retailer’s consumers, suppliers, markets as well as other categories included in the store (category mix). It is considered that there are two alternative views for setting up the category:

Consumer based division •Retailer based division•

Theconsiderationofreachandfrequencyisoftenusedtodefinecategories.Nocategoryhasaroleautomaticallyattachedtoit.Itisuptotheretailertodefineandrefinethecategorymixandportfoliotofittheirstrategicgoalsand consumers needs.

When category roles are being assigned, the following four basic roles based on consumer preferences and behaviour are often used:

Destination.• Categoriesthatretailerusestodefinetheirstoreasofferingsuperiorconsumervalueandbeingthe choice of location for shopping in these categories. For example soft drinks and coffee are often considered to be destination categories. Routine. • These are the categories that consumer most buy on a regular basis when shopping. Milk and pet care are often referred to be routine categories. Occasional/Season.• These categories include products that are bought infrequently and/or on certain occasions or seasons. For example, suntan and cleaning products are such categories. Convenience.• These are products that are often offered with better prices, range and/or quality in specialty stores, but the trade-off visiting another store to purchase them, makes consumer shop them along other products at the retailer. For example, shoe and leather care as well as car products are good examples of this category.

The other approach to categories is the retailer-based. The advantage of this approach is retailer’s better understanding ofcategoriessalesandprofitsandabilitytousemoreobjectivemeasuresinanalysingcategory’ssuccess.Therolesin the retailer based approach are:

Destination/trafficbuilder•Store loyalty builder•Margin enhancer•Cashflow•Impulse•

6.4.3 The Role of the Category within the Retailer’s Total AssortmentCategory management not only looks at the detail of the product SKU ‘members’ within the category, but is also concerned with the role of the whole product category within the retail outlet, and the contribution the category makes to the strategic positioning of the retail brand identity. Retailers are using category management in the pursuit of product differentiation to gain a competitive advantage over their rivals. They need suppliers who understand their retail market positioning and who can help them to improve the performance of their strategic product categories, notonlyfromthepointofviewofshorttomediumtermprofitability,butalsotoenhanceanimageofcreativity,innovation and excitement. Category orientated point of sale display materials can reinforce a strategic product category positioning.

6.4.4 Establish the Performance Measures for the CategoryAnintegralpartofamanagementapproachthatlookstowardsefficiencyindemandmanagementaswellassupplymanagement,categorymanagementhasprofitabilityas itskeyperformance indicator.Activity-basedcosting isrecommended for evaluating category performance because it not only considers the costs of supply (logistics and selling) but it also takes account of the costs associated with demand management, such as the costs of product introductions and the costs of promotional activity. More recent approaches to performance measurement have

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included the concept of the scorecard, which allows success to be measured across a number of indicators, according to their relevance to the retailer concerned.

Th aim of category scorecard is to establish qualitative and/or quantitative performance measures for the category goals in order to be able to review and adjust the execution of category business plans. Measurements depend on the categoryaswellasthestrategies,butcommonlymeasuredincludemarketshare,salesandprofits.Ideaofthescorecardis to support and align category plans and incentives and also the structure and execution of these plans.

6.4.5 Formulate a Strategy for the CategoryFor every category, marketing, product supply and in-store strategies need to be developed and determined. Having definedthecategoryanditsrolewithintheretailbusiness,andestablishedoptimumprofitabilityasthesuccessindicator, the next step in the category management process is to draw up a strategy for that particular group of products. It is at this stage that issues such as promotional activity, product assortment planning, own-brand strategy andproprietarybrandsupportneedtobeblendedtogetherinordertomaximisecategoryprofitperformance.Theposition of the category within its own lifecycle will impact upon the viability of the strategy. Often the category strategiesincludethemessuchastrafficandtransactionbuilding,profitcontribution,cashgenerationaswellasvariousaspectsofconsumermarketing.Thesestrategies,togetherwithsufficientconsumerunderstanding,helpincreation of the category’s marketing actions and mix.

6.4.6 The Category MixThe setof tacticsused to achieve theoptimum rangeassortment andobtain efficiency inpromotions,productinnovation and replenishment, will be determined by the strategy formulated for the category. In essence the category receives its own marketing mix, within the parameters of the retail branded identity. For example, by conductingefficientpromotions,aretailerdoesnotwasteresourcesbypromotingbrandswhoseperformancedoesnotpay.Takingamoreanalyticalapproachtopromotionalactivitycanvastlyimprovetheprofitabilityofaproductcategory, by removing costs associated with promotional activities that are not in the best interests of the retailer’s product range performance. Many promotions require time and effort to set up, data input amendments, production ofspecialcommunicationsandpackaging,andmayresultindeflectingsalestoaproductwithalowerproductprofit.Unlesspromotionalactivityisgoingtoresultinoverallbetterperformanceofthecategory,orbringsomeotherlong-termbenefittotheretailer(suchasloyaltytoastorebecauseofitsoffers),thenitmaybebettertoresistthe promotion.

Point of sale displays can also be viewed with the same analytical judgement; for example, changes to shelf allocations, or the use of point of sale materials should only be undertaken if they have the potential to improve the performance of the whole category for the retailer. Prices may also be manipulated in order to maximise category performance. The use of ‘known-value’ items is important in value-driven categories such as packaged bread, where there is considerable price competition, whereas in premium-product driven categories, such as wine, retailers have moreopportunitytoincreasemarginsandbenefitfromimpulsebasedpromotionaloffers.

6.4.7 Plan Implementation Inthis,stepbystepactionplanforthecategoryisdone.Whiletacticsdefinewhatisdone,implementationfocuseson by whom, when and how the tactics are done. Thus, such plans require the assignment of responsibilities, timing and resources.

Category Review While category management plans are put into action, constant review is done to observe, assess and adjust the plans as needed. In the review phase, also some of the previous steps can be repeated if necessary.


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Category management includes:Space planning to ensure desired display space.•Assortmentplanningtofacilitatetheachievementofrequiredfinancialobjectives.•Visualmerchandisingtooptimisedisplayefficiencyandaidwalk-ins/conversionsinastore.•Inventory management to ensure required stock cover and avoid being out of stock.•

Productgroups/categoriesshouldbedefinedbasedontheconsumer’sneedsandpurchasinghabits.

Fig. 6.5 Product groups or categories

6.5 Space PlanningConsiderations for layout decisions:

Highmarginitemsshouldbeplacedinhightrafficareas.•Highdemanditemsshouldbeplacedinlowtrafficareas.•Complementary items should be placed near each other.•Seasonal needs should be considered.•Items needing frequent restocking should be placed near storerooms or cash registers.•Largerdepartmentsshouldbeplacedinlowertrafficareas.•Impulse items should be placed in closer to billing.•Shopping behavior and operational considerations should be recognised.•

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Fig. 6.6 Layout options(Source: Roy, A., 2009. Introduction to category management and assortment planning in retail industry,

KINDUZ Business Consulting)

Thebenefitsofspaceplanningare:Inviting store layout improves walk-ins into the store.•Improved circulation space within the store allowing for accessibility to all products.•Improved conversion rates by better product visibility and display.•Reduction in shrinkage.•The store layout can impact the customer’s perception of the store’s positioning.•

Assortment planningAssortment plan or the merchandise mix is rated around the globe as the second most important factor for a store, afteritslocation.Theassortmentplandefinestherevenuestream,impactingnotonlythetoplinesandbottomlinesbut also the working capital locked in inventory.


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Fig. 6.7 Assortment plan(Source: Roy, A., 2009. Introduction to category management and assortment planning in retail industry,


Key deliverables in an assortment plan are:Required average revenue•Required gross margin•Required average ticket size•Required stock cover based on demand forecast•Suitableproductaspercatchmentanalysisandtargetcustomerprofile.•Basedoncompetitionstudy,merchandisemixshoulddefinethestore’sUSP.•

Fig. 6.8 Assortment planning(Source: Roy, A., 2009. Introduction to category management and assortment planning in retail industry,


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BenchmarkingBenchmarking is the process of comparing one’s business processes and performance metrics to industry bests or best practices from other industries. Dimensions typically measured are quality, time and cost. In the process of benchmarking,managementidentifiesthebestfirmsintheirindustry,orinanotherindustrywheresimilarprocessesexist, and compare the results and processes of those studied (targets) to one’s own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firmsaresuccessful.Incorrectmarketpositioningresultsinwastedresourcesbycompetingwithplayersthatarenottherightmatch.Defineyourfocusmarketsegment,keycompetitorsandidentifywhereyouropportunityis.

Fig. 6.9 Benchmarking(Source: Roy, A., 2009. Introduction to category management and assortment planning in retail industry,


Customer analyticsCategory management begins with the consumer. Understanding of customer buying patterns is critical for all retailers. Definingthetargetcustomer’sbuyingpower,age,categorypreferencesandregionalinfluencescanpositivelyimpactyour top-line. Companies must determine:

Who the consumer is – age, economic status, residence, etc.•Whattheconsumerbuys–products,brands,colours,flavours,etc.•What kind of shopping trip is typical – in/out, convenience, destination trip, etc.•How the consumer buys – by promotion, price, product, etc.•How often the consumer buys – daily, weekly or monthly•


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Fig. 6.10 Customer analytics(Source: Roy, A., 2009. Introduction to category management and assortment planning in retail industry,


Store layoutThestorelayoutclearlydefinesthestockingcapacityofthestoreandhenceenablesdetailedSKUqtyordering.

Category compositionOncethebroadcategoriesaredefined,thefinerdetailsneedtobeplanned.Theaboveexamplesummaryisbasedon a detailed subgroup level plan, both in terms of space allocation and sale projection.

Sub-category planningWithin a category, shelf displays are planned product wise and supplier/brand wise. Based on past sales experience ormarketfigures,asalesprojectioniscreatedwhichconfirmstheinventoryrequirementandhencetheinvestmentrequiredforthefirstfill.

Sourcing strategyThe strategy for sourcing is based on:

Lead-time to store launch•Margin requirement•Stock availability•Working capital availability•

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Fig. 6.11 Sourcing strategy(Source: Roy, A., 2009. Introduction to category management and assortment planning in retail industry,


Fig. 6.12 Pricing strategy


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SummaryAcategoryisagroupofsimilarorrelateditemswhichthecustomerwouldideallyliketofindtogetherina•store.A category is a distinct and manageable grouping of products that consumers perceive as interrelated and possibly •interchangeable in meeting their needs. Categorymanagementisdefinedasthestrategicmanagementofproductgroupsthroughtradepartnerships,•whoseobjectiveistomaximisesalesandprofitsbysatisfyingconsumerneeds.In category management, suppliers play active role in the management of the product group.•A category may include a number of leading manufacturers’ brands, retailers’ own brands and some speciality •products,allofwhichhavetheirownspecificsalesvaluesandprofitmargins.Category management is a consumer-led process, and only by having a deep understanding of consumer needs •andprovidingaproductassortmentthatfullysatisfieseachshopperastheyinteractwithaproductcategory,performance can be maximised in the long term.The goal of category management is to improve the operating results of a retailer and its associate partners, •including manufacturers, distributors and brokers, by focusing on the consumer.Category management is a way of organising buying and merchandising activities to make product ranges work •hard for both retailer and customer.Efficient consumer response (ECR) describes this type of all-encompassing supply chainmanagement•system.ECR manages the goods supply through the retail supply chain according to their demand by consumers.•Efficientstoreassortmenttargetsthedevelopmentofvariousgroupingsofproductsandservicesthatareprofitable•and satisfy consumer needs.Pointofsales(POS)dataiscriticaltoefficientstoreassortment.•Efficientproductintroductionfocusesonefficientandeffectivelaunchesofnewproductsbasedontheneeds•of consumers.Efficientproductpromotiondealswiththeefficientandeffectiveexecutionofpromotionstrategieshavinga•tremendous impact on the supply chain.Barcodes and scanners’ use is a fundamental element for ECR implementation in the grocery industry as it •allows accurate and faster information capture to be obtained.EDI refers to technology enabling the interchange of different business documents from purchase orders to •invoices.Activity-based costing is a new costing tool which works on the principle that activities are what really affect •costs.An automatic system which observes inventory levels and makes necessary adjustments when required is called •computer-aided ordering.The vendor, known as the category captain , works with the retailer to develop a better understanding of shopping •behavior, create assortments that satisfy consumerneeds and improve the profitability of themerchandisecategory.Assortment plan or the merchandise mix is rated around the globe as the second most important factor for a •store, after its location.Within a category, shelf displays are planned product wise and supplier/brand wise.•Thesetoftacticsusedtoachievetheoptimumrangeassortmentandobtainefficiencyinpromotions,product•innovation and replenishment, will be determined by the strategy formulated for the category.For every category, marketing, product supply and in-store strategies need to be developed and determined.•Th aim of category scorecard is to establish qualitative and/or quantitative performance measures for the category •goals in order to be able to review and adjust the execution of category business plans.

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Retailers are using category management in the pursuit of product differentiation to gain a competitive advantage •over their rivals.A purpose is assigned to the category in relation to retailer’s consumers, suppliers, markets as well as other •categories included in the store (category mix).Category management is a step-by-step planning and implementation process that helps retailers and suppliers •achieve both performance-based objectives and longer-term strategic aims.Thedefinitionofacategorychangesbetweenretailers,accordingtothesizeanddegreeofspecialisationinthe•format used.

ReferencesVarley, R., 2006. • Retail Product Management: Buying and Merchandising, 2nd ed., Routledge.Roy, A., 2009. • Introduction to category management and assortment planning in retail industry, KINDUZ Business Consulting.UPS Supply Chain Solutions SM, • Building a Category Management Capability [pdf] Available at: <http://www.ups-scs.com/solutions/white_papers/wp_category_mgt.pdf > [Accessed 23 April 2012].Helsinki School of Economics, 2010. • Category management and captainship in retail. Case: Baby food in Finland [pdf]Availableat:<http://hsepubl.lib.hse.fi/FI/ethesis/pdf/12203/hse_ethesis_12203.pdf>[Accessed23 April 2012].stntraining, 2011.• Basics of Category Management [Video Online] Available at: <http://www.youtube.com/watch?v=Lxfi3hnLZv4>[Accessed23April2012].webesomar, 2007. • S. Needel - What’s the future of category management? part 1 [Video Online] Available at: <http://www.youtube.com/watch?v=Ss8Dn8_BZu0> [Accessed 23 April 2012].

Recommended ReadingBhatia, S. C., 2008. • Retail Management, Atlantic Publishers & Dist. Chiplunkar, 2011. • Product Category Management, Tata McGraw-Hill Education.A.C. Nielsen Company, Karolefski, J. & Heller, A., 2005. • Consumer-Centric Category Management: How to Increase Profits by Managing Categories Based on Consumer Needs, John Wiley & Sons.


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Self AssessmentA_______isagroupofsimilarorrelateditemswhichthecustomerwouldideallyliketofindtogetherina1. store.

categorya. signageb. brandc. business unitd.

Which of these is not a required infrastructure in category management?2. Peoplea. Processb. Measurement Toolsc. Performance Measuresd.

_________ is a managerial approach that starts with consumer demand, and then gears the whole of the supply 3. chain to responding to that demand. It is a customer driven, manufacturing schedules’.

ECRa. CRPb. POSc. EDId.

________refers to technology enabling the interchange of different business documents from purchase orders 4. to invoices.

Barcodes a. EDIb. CAOc. ABCd.

_________is a retail-based system that automatically generates orders for replenishment when the inventory 5. level drops below a pre-determined reorder level.


__________offersabetterunderstandingofhowprofitsaregenerated,asitincreasesthevisibilityofcostsin6. a particular environment.


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Whichisthefirststepofcategorymanagementprocess,inwhichtheretailerdefinesthecategorybyassigning7. range of products to it?

Categorydefininga. Category reviewb. Establishing category marketing mixc. Formulate a strategy for categoryd.

_______refers to measuring, monitoring and modifying the category.8. Categorydefininga. Category reviewb. Establishing category marketing mixc. Formulate a strategy for categoryd.

Which of the following statements is false?9. A purpose is assigned to the category in relation to retailer’s consumers, suppliers, markets as well as other a. categories included in the store (category mix).Category management has accessibility as its key performance indicator.b. Th aim of category scorecard is to establish qualitative and/or quantitative performance measures for the c. category goals in order to be able to review and adjust the execution of category business plans.For every category, marketing, product supply and in-store strategies need to be developed and d. determined.

Which of the following statements is false?10. Point of sale displays can also be viewed with the same analytical judgement.a. Prices cannot be manipulated in order to maximise category performance.b. While category management plans are put into action, constant review is done to observe, assess and adjust c. the plans as needed.Assortment plan or the merchandise mix is rated around the globe as the second most important factor for d. a store, after its location.


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Chapter VII

Allocating Retail Space to Products

Aim


definemicro-merchandising•

state the key objectives of retail space management•

explain space elasticity•

Objectives


describe space management•

identify the different steps of space management process•

describespaceallocationonthebasisofproductprofitability•

Learning outcome


state the different practical and customer considerations•

describe space allocation on the basis of sales•

explain the space allocation systems•

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7.1 IntroductionIn an era when physical retail space is constrained by planning restrictions and rising costs, productive use of space is a key indicator of buying and merchandising success. High space productivity depends on offering the right range, in alogicallayout,withproductsavailableandeasyforthecustomertofind.Decisionsabouthowmuchspacetodevoteto each product line and its location in the store play an important role in the pursuit of merchandising success.

7.2 Space ManagementSpace constraint applies to all retailers, but in non-store retailing the constraints are different. For example, a mail order retailer has page space and the number of pages in a publication as constraining factors, whilst a TV shopping channel needs to break down the airtime to different products. However, internet retailing gives great opportunities for adding space without much additional resource input. The main constraint on the amount of space used in a virtual outlet is the attention span of the customer. The objectives of space allocation are essentially the same, no matter which retail format is used.

The management of retail space is concerned with a number of key objectives. Thefirstistooptimisebothshort-termandlong-termreturnsontheinvestmentcostofretailspace.•The second is to provide a logical, convenient and inspiring interface between the product range and the customer. •This can be important particularly in a large store, where customers can quite easily become overwhelmed and lost. Thethirdistomakesurethattherightselectionofproductsisavailable;thatproductsfitintotheretailspace•and that stock-outs are avoided. Choice for the customer is maximised when the best selection for them is put into the available space.

Space allocation also has an important role to play in communicating the retail brand. When space is managed centrally, it helps a chain of retail outlets to achieve visual consistency, so that customers are reassured by the similarity of the store layout and shelf appearance.

7.3 The Space Management ProcessA retailer goes through a number of stages when allocating space to products.


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Fig. 7.1 Space management process

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7.3.1 Measuring Retail SpaceAlthough space in a store outlet is 3D, retail space is often measured in square, rather than cubic units. Square unitsareappropriatewhere,forexampleinfashionretailing,avarietyofsingletierfixturesstandontheshopfloor.However,manyfixturesaremultilevelandsomoreappropriatewaysofmeasuringspacetoallocatemightbeonthebasisoflinearorcubicfootage.Measurementsofspacethataremorespecifictoindividualretailersmightbeuseful,suchasthenumberofpagestobepublishedinacatalogueorthetotalnumberoffixturesavailableinanoutlet.

Space productivityThetwoprincipalmeasuresofretailsuccessaresalesandprofits.Salesvolumeandprofitabilitycanalsobemeasuredinrelationtotheamountofspaceusedtogeneratethoselevelsofsalesandprofits.Thiscanthenbecomparedwiththeleveloffinancialinvestmentinthatspace.Theresultingmeasuresexpresstheretailspaceproductivity.Sales(orprofits)persquaremetreisacommonlyusedmeasureofretailspaceproductivity.Thisisanimportantconceptin the evaluation of retail product management performance.

7.3.2 Dividing The Space Into Selling AreasAtthisstage,spacemanagementisconcernedwithallocatingspacetodifferentproductareas,definedaccordingto individual retail businesses, but usually on the basis of product department or category. The amount of space will be determined to a greater extent on previous performance indicators, typically sales values. However, some products, because of their physical characteristics may need disproportionate amounts of space in relation to sales. In a department store, home furnishings may need a relatively large amount of space to generate a good sales’ level because the products are bulky, a large variety of merchandise is needed for customers to choose from and a lot of display space is needed to do the product justice.

On the other hand, jewellery is a high value product category that needs relatively small amounts of space for display andsellingpurposes.Thestageaproductcategoryisatinitslifecycleislikelytoinfluencethespaceallocationatthis level. If a category is growing, then more space should be allocated, whereas a declining category needs to have itsspacerationalised.Homefurnishingsretailershaveincreasedthespacedevotedtolaminateflooringinresponsetothegrowingpopularityofwoodflooring.Althoughsalespersellingspacearethemostcommonlyusedindicatorofdepartmentalproductivity,theprofitabilityofthedepartmentorcategorymayalsohaveabearingontheamountofspaceallocatedatthislevel,sothat,forexample,thehighertheprofitmarginsontheproductswithinaproductrange, the more space is given to those products.

Fig. 7.2 Measuring retail space using square metres(Source: Varley, R., 2006. Retail product management buying and merchandising, 2nd ed., Routledge.)


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Fig. 7.3 Using linear measurement for retail space(Source: Varley, R., 2006. Retail product management buying and merchandising, 2nd ed., Routledge.)

Fig. 7.4 Using cubic measurement for retail space(Source: Varley, R., 2006. Retail product management buying and merchandising, 2nd ed., Routledge.)

7.3.3 Determining The Layout And Deciding On Product AdjacenciesThe numerical calculation of the selling areas is converted into a workable retail outlet layout at this stage. Having determined the amount of space that each department or category should be given based on their individual productivity, the areashave tobefittedaroundand into theactual spaceavailable.Someoutlet spacemaybeflexible,butsomeelementsareimmovable,suchascheckoutareas,entrances,walkwaysandsoon.Aswellastheseconstraints, space can vary in terms of its ‘quality’ or potential to generate high sales and product departments need tobeorganisedsothatthereissomelogicalshoppingflowthroughtheoutlet,andcomplementarycategoriesareplaced close to one another.

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Space qualityWhen evaluating the level of productivity that retail space is generating, some consideration of the quality of the retail space should also be given. This is because within any retail outlet, some space will be better for selling from than other space. For example, every shopper has to pass an entrance, so this is a key area for promoting not only fast selling items, but those that play an important part in the overall retail brand image. High quality items, seasonal goods and the latest fashions are good choices for selling areas near entrances. In contrast, some areas, like the back of the store, need to have products that are particularly interesting so that customers are pulled into areas that would normallyhavelowtraffic.Discountedmerchandiseisusefulforpullingcustomerstoquieterareas.Tillareasoffera retailer last minute purchasing opportunities, so impulse items are often located here.

Thefinancialvalueofretailspaceisusuallyexpressedinsquaremetres.Rentandlocalgovernmentratesareusuallycharged at a rate per square foot or metre, and although alternative measures of retail space productivity are useful for retail product management, sales per square metre (sales density) is the measure most commonly used to compare the productivity of different retail outlets.

Ground-levelspaceismorevaluablethanotherfloorsbecauseitismoreinconvenienttocustomerstogetthemselvesto a different level. In a multi-level shopping centre, this becomes evident when the rent values of ground level outlets are compared with those of basement or upper levels. It is generally accepted that the value of space reduces from front to back of the store and increases when close to high footfall routes. Therefore, the following elements ofastore’sdesignwillinfluencethevalueofspace:

Entrances•Lifts and escalators•Service departments (toilets, cafes)•Destination product areas (for example, a delicatessen counter in a supermarket)•Payment areas•

Areas of a retail outlet that are particularly effective places for selling are ‘hotspots’. Exact location of these ‘hotspots’ in any particular store will depend on the physical characteristics of individual outlets. Retail management can also manipulatethecustomerflowinanattempttomaximisespaceproductivitybyallocatingpoorerretailspaceto‘destination’ products and services. This is particularly evident in department stores, where specialist products such as furniture and home entertainment, as well as hairdressing salons and customer service departments are located onbasementorupperfloors.Customerflowcanalsobeencouragedbylocatinghighdemanditemsthroughoutthestorelayout,withplentyofimpulseitemslocatedinbetween.Retailersneedtofindabalancebetweenmaximisingsalesofhighdemandproducts,generatingflowaroundslowersellingproducts(mayhavehigherprofitmargins)and providing logic and convenience in the layout for the customer.


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Fig. 7.5 Typical ‘hotspots’ in a retail store

Product adjacenciesA logical route through the different product categories or departments is part of a customer focused offer, and can encourage linked sales. For example, in a baby equipment retailer, it makes sense for merchandise to be grouped into themes for space planning purposes. These product themes are then presented in a logical way to the customer astheymovethroughthestore.Productsforimmediateneeds,suchasfeedingandgeneralbabycarecomefirst,followed by bath-time and clothes; and then on to the more expensive, one-off purchases in the travel and nursery departments.

Feeding Baby care Bath time Clothes Travel NurseryBottles Nappies Baby baths Sleepwear Prams Cots

Sterilisers Wipes Soaps/liquids Daywear Pushchairs Bedding

Formula milk Change mats Towels Shoes Strollers Toys

Bottle warmers Travel bags Toys Outerwear Car seats Travel cotsBibs Furniture

Table 7.1 Product groups in a baby equipment retailer

7.3.4 Allocating Space To Individual ProductsHaving made a plan for the layout of departments or categories within the retail outlet, the next stage is to make a decision about exactly how individual product lines should be displayed within the outlet, whether the product isgoingtositonafixture,orberepresentedbyaphotographwithinapagespread.Variousapproachestospaceallocationarediscussed,byusingsalesorprofitsasaguideline,somepracticalchallengesareconsidered,andtherelationship between category management and space allocation is explored.

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Allocating space on the basis of salesThe guiding principle is that the more a product sells, the more space it should be given. Retaining a high stock service level will depend on retailers ensuring that they devote enough space to a high demand product, such as milk,topreventreplenishmentofthatitembecominginefficientandinconvenienttothecustomer.Afastsellingitem(forexample,milk),however,maynotbeonethataretailermakesmuchprofitonandsotheymaydecidetoallocatemorespacetotheirprofitablelines.Intakingthisapproach,however,theretailerislikelytoencountertheproblem of not devoting enough space to fast moving lines, so a balance has to be achieved. Another decision that hastobemadeiswhich‘sales’figureshouldbeusedfortheallocation.Alternativesarehistoricalsalesfigures(forthatoutlet);marketsharefigures;orprojectedsalesfigures.

Parameters Advantages DisadvantagesHistorical sales data

Easy to access•Will indicate local preferences and •influences

Will not allow for the potential of product lines •that the store does not carry or for new productsDoes not allow for current and forecasted changes •in trading environmentSales data may be net of returns, therefore where •stores have a high level of returns from other branches or non-store channels, this will distort thesalesfigurerecordedandcouldunderminethepotential sales of product categories

Market share Easy to access (from published •market reports)High demand products will be well •supported, which is likely to appeal to the mass consumerProvides some indication of space •allocation that is appropriate for products that are new to a given retailer, although not new to market

New or emerging products and categories will not •be given the space allocation that their potential could warrantThe product selection may appear mundane, •ornon-specialist,as it reflects themassmarketrather than being tailored to individual store/outlet catchmentprofileLocal preferences are not catered for•It may be appropriate to shrink the space of •a declining category faster than sales would indicate to prevent the product selection looking outdated

Projected sales

Projected sales are likely to be •based on historical sales as far as possible,andwillthereforereflectindividual outlet characteristicsIncorporates (estimated) sales •figures for new products and categoriesHistoricalfiguresmayhavebeen•affected by stock control or quality problems, which can be accounted forintheprojectedsalesfigure

Actual sales may not meet projected sales, resulting •in space being devoted to slow sellers while the faster selling products are underrepresentedIt may be appropriate to shrink the space of •a declining category faster than sales would indicate to prevent the product selection looking outdated

Table 7.2 Comparing alternative approaches to allocating space according to sales


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Inthiscase,thesalesfiguresrelatetothesalesofthatparticularproductinallretailersinthemarket.Thisapproachis known as the level run down principle, and it assumes that individual products sell at the same rate in all retail outlets.

Space elasticityAllocating space according to a measure of sales assumes that there is a relationship between the amount of space and the rate of sales. This relationship is called space elasticity of a product and it refers to the extent to which the sales of a product will change in response to a change in the amount of space allocated to that product. Space elasticity is not uniform amongst products, or across stores or departmental locations. In particular, the extent to which a product is bought on impulse will affect its space elasticity. If our attention is grabbed by a tonnage (high volume) display of a product such as cereal, or wine, we may succumb to an impulse purchase, but we are unlikely to respond as positively to an increase in display space of a staple store cupboard item such as salt or sugar.

TheinfluenceofotherproductsintheretailofferThesaleofoneproductcanbeinfluencedbythesalesofotherproductsinanumberofways.Cross-elasticity is the direct relationship between changes in the sales of product. For example, if there is a promotion on pasta sauces which increased sales, the rate of sales of pasta is also likely to increase. If brand X has a price reduction, the sales of directly competing brand Y would decrease. Therefore space allocations of complementary andsubstituteproductsmayhavetobeadjustedaccordingtoanychangestothemarketingofaseparate,influencing,product.

AllocatingspaceaccordingtoproductprofitabilityAllocatingspacebyanyofthesales-basedmethodsislikelytoresultinsales,ratherthanprofits,beingmaximisedand, if strictly implemented, would not take into account some of the more practical considerations about allocating retailspaceintoaccount.Therefore,analternativeapproachwouldbetousetheprofitsgeneratedbyeachproductasthebasisonwhichtoallocatespace.Usingprofitmeasuresasabasisforspaceallocationwillpreventaretailmanagerfromallocatinglargeamountsofbestqualityretailspacetounprofitableproducts.Itcouldmeanthataretailer was allocating unnecessarily large amounts of space to products that would sell as well with a smaller space. Profitablelinesmaynotinfactsellveryquicklyatall,andallocatingextrafacingsorshelvesoftheproductmayhave very little impact on the sales of the product. In this case, the quality of the space becomes important, so the retailercanlocatehighprofititemsinlocationsaroundthestorethatarebetterforselling.

Allocatingspaceaccording tosales,and inparticular,productprofitability, isworkingwith the interestsof theretailer, and not the customer in mind and therefore may suggest an illogical and confusing presentation of products. Long-termprofitabilitydependsoncustomerloyalty,whichisdependent(amongmanyotherthings)uponbeingsatisfiedwiththepresentationandassortmentofproducts.Therefore,fine-tuningoftheallocationofspacewithina retail outlet requires extensive amounts of high quality data, together with a practical and customer orientated managerial approach at store level.

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Fig. 7.6 Space allocation alternatives(Source: Varley, R., 2006. Retail product management buying and merchandising, 2nd ed., Routledge.)

7.4 Practical and Customer ConsiderationsThe different practical and customer considerations are:SeasonalitySeasonal products need to be allocated more and better space at their peak selling periods. It may be necessary to allocate larger amounts of space to keep pace with customer demand; and allocating the best quality and increased quantities of space in line with seasonal events also has a reminder effect on customers and increases impulse purchases.Highprofileseasonaldisplaysalsohavethemoregeneralpositiveeffectofgivingtheperceptionofaninteresting and relevant product selection overall. Examples of seasonal products in a home and garden improvement retailer that could be promoted are as follows:

Summer: garden furniture and barbecues•Autumn: garden vacs, rakes, compost bins and bulbs•Winter:heatingproductsandfireplaces•Spring: cleaning products, paint and seeds•

Product characteristicsThe product characteristics may determine its space allocation in terms of both quality and quantity of space. Slim nappies are not only convenient for parents; smaller packs are often used by the retailers to offer more choice within the same space. Heavy and hazardous products should not be located on high shelves because of the increased danger anddifficultyofhandlingforcustomers.


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Some products have special requirements of the display space that is allocated to them, which add further complicationstospacedecisions.Forexample,chilledorfrozenproductshavetobedisplayedindedicatedfixtures.It is safe and hygienic to have the products near to the chilled or frozen stockroom storage space. Other products may need protection because they are hazardous or fragile, or simply expensive and attractive to shoplifters. Multi-packshavetobeconsideredintheirtotality,whichmakesthemlargerandso,moredifficulttoshelvethansinglepacks. Bottom shelves may be able to be extended slightly in order to accommodate multi- or large-pack items. Contamination potential is another important consideration for product adjacencies. Products such as washing powder,firelightersandairfreshenershavethepotentialtogiveoffodours,whichcouldseriouslyaffectthequalityof any food product placed next to them.

Customer characteristicsNot all space in a retail outlet is accessible by customers. This might be an advantage, for example, for the storage of expensive and fragile goods, but if the target market includes children, then their physical size must be considered in terms of the space allocated to their products. The eyelevel space will be lower and if the product is self-selection (for example, pick and mix confectionery) then the reach must be comfortable. In today’s market where ‘pester power’ (refers to children’s ability to nag their parents into purchasing items they may not otherwise buy) is a considerable force, the space allocated to cereals, desserts and soft drinks needs to have the child’s viewpoint in mind. Retailers also need to bear in mind the growing number of senior customers, who may have restricted mobility; putting smaller pack sizes on high shelving would not endear the retailer to this customer group.

Fixture limitationsWhenallocatingspacetoproducts,retailmerchandisersmustbearinmindthefixturingthatisavailablefortheproduct.Forexample,fragileproductsmayneedfixturingthatisattachedtoawalltoprovideadditionalstability.A large variation in pack size wastes vertical shelf space and looks untidy. Long garments have to be housed on fixturesthatpreventtheproducttrailingontheground,butstillenablethecustomertoseealltheproductdetail.Usingflexiblefixturingcancreateadditionalspace,suchasdumpbinsforpromotedmerchandise.

7.5 Space Allocation SystemsClearly, the factors that contribute to a good or a bad space allocation decision are numerous and often interrelated. Space allocation was an early candidate for computer applications in retailing. Nowadays systems allow retailers to feed in a wealth of relevant data about individual SKUs and, according to objectives of the retailer; the computer system will suggest the space allocation to use. The most up-to-date systems allow retailers to use both qualitative and quantitative data as inputs. These inputs can be broken down into three types:

Product information•Direct product costs, or activity based costs �Sales data (forecast or actual) �Size of product �Size variations �Complementary products �Bulk delivery restrictions �

Fixture information•Specificdisplayrequirements(forexample,shelflevel) �Sizeoffixturing �Numberoffixturesavailable �

Product manager’s knowledge (based on experience and expertise)•Space elasticity �Cross-elasticity �Stock-holding objectives (for example, target availability level) �

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Category lifecycle stage �Displayandfixturingrequirements �Marketing objectives (for example, to improve own-brand preference) �

Along with the increasing sophistication of space allocation systems in terms of the kind of data that can be processed, the outputs of the systems have also improved. Early systems often only gave numerical output, lists of product codes given in the order were to be placed on the shelves. The use of digital imaging has helped to develop realistic 3D productrepresentationsthatcanbemovedaroundvirtualshelvinginordertofindthemostattractivearrangementof product within a space-optimised category.

Today’s systems produce illustrations of photographic quality which give store personnel a clear indication of the ideal allocation and appearance of the products on the shelf. These outputs called planograms and the producer of the planogram (or space planner) provides a link between the buying and merchandising section of the retail organisation and the store network. The planogram helps a retail chain maintain its corporate identity by setting out the arrangement of products within the outlet, whilst maximising space productivity. The focus of space management ismovingfromproductivityandefficiencyandtowardsvisualdisplayimprovementsforsomeretailers.Onceanoptimumlevelofefficiencyisachieved,spaceplannerscanmoveontotheobjectiveofmakingtheirproductsandfixtureslookmoreattractivethantheircompetitors’.Someofthelatestspaceplanningsystemsisabletosimulatethe entire store environment, so that the product manager can view an assortment plan in virtual reality and make any necessary adjustments. Recent space optimisation technology applications offer the opportunity to create store-specificplanograms.

7.5 Space Allocation and Category ManagementTheperformanceofindividualproductlinesisimportanttoretailersintermsoftherateofsaleswhichinfluencesavailabilityandthelevelsofcontributiontoturnoverandprofitability.However,thefocusofperformanceinmanyretail organisations is at product category, rather than individual SKU level. A retailer is more interested in overall levelsofsalesandprofitsgeneratedbytheirproductrange,ratherthanthesalesofasinglelinethatmightbeofinterest to its manufacturer.

Theproductcategoryhasemergedasamanageableclassificationformostaspectsofproductmanagement,andcertainly applies in the case of space management. Many would argue that space planning and allocation and the systems that drive the process can only be properly implemented in tandem with a category management approach. Categorymanagementseekstooptimisethedepthandvarietyofaproductassortmentwithinaspecifiedamountofretailspaceandtogeneratemaximumprofitabilitybyseekingefficiencyintheoperationsthatsupportthedepthand variety. This includes replenishing to guarantee availability and adding new products and running promotions to generate customer interest and increase short-term sales of particular products, without harming the overall profitabilityofthecategory.

Spaceallocationsystemsallowfine tuningofacategoryassortment,provide themeansbywhichproductandcategory performance can be monitored and analysed, and by using the planogram output the plans can be easily communicated and successfully implemented within the various retail outlets.

In some categories key brands are dominant, in which case their presence needs to have immediate impact within the space allocation plan. Other categories are very competitive, in which case low price, budget own brand and promotional products would feature strongly on the planogram. Many retailers use the principle that shoppers will ‘read’ a category from bottom to top, and left to right, and so well-known brands are placed on middle and lower shelves on the left of the category space in order to provide strong cues to the customer. Premium products meanwhile areplacedonhighlevelshelves,reflectingtheirhighqualitypositioning,andthefactthatthecustomerforpremiumproducts will seek out the better quality product within the category.

Insomecategoriesthecustomerdecision-makingprocessesarequiteuniqueandneedtobefullyreflectedwithinspace allocation plans. For example, the decision sequence for yoghurt might be:


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Naturalorflavoured→type(lowfat,standardorluxury)→pricelevel→brandThese decision processes should determine how products are displayed within the category space. Aesthetic considerationsarebecomingmoreimportantinspaceplanning.Theappearanceofproductsonfixturesmakesaconsiderable contribution to the overall retail outlet’s design and as the visual qualities of the space planning systems’ output improve, retailers can try different ways of laying out the product category before their dcision. Also, space planning systems are increasingly becoming integrated with range planning systems so that visual considerations can be incorporated in the early stages of range planning.

For many small retailers, the cost of a computerised space planning system is prohibitive, and so many rely on basic sales andprofitmargin analysis combinedwith trial anderror in space allocationdecision-making.Thisapproachislikelytobesufficient,andthecomparisonsmayprovideabasicanalysisonwhichtostartmakingspace decisions.

7.6 Store GradingComplexity of space planning is taken a level higher when a retailer has a large variation in store size. Most large retail groups apply a system of store grading which is largely dependent on store size and sales level, but can also take intoconsideration localcatchmentcharacteristics (suchaspopulationprofile, shoppingcentreprofile,andcompetition). For each grade of store, a separate planogram will be produced; but even within the grades, physical constraints may make it necessary for store management to use a certain level of interpretation of the general plan to allow a sensible arrangement for their particular store.

With the use of virtual systems, it is possible to enter individual store information and produce individual planograms for each store in the group. This might be appropriate for a product range that is relatively stable throughout the year, but for a retailer who reacts to season and fashion changes, once task is so complex that the use of virtual systems may not be cost-effective. If store planning is so rigidly enforced from a central planning department, local managers may lose the motivation to take initiatives and apply commercial creativity to their stores.

7.7 Micro-MerchandisingWhen the pressure is on to maximise the contribution from every inch of retail space, the relationship between that space and the customers using it, needs to be highly integrated. A retailer experiencing slow selling products, high levels of markdowns and that ends up doing a high number of in-store transfers could be a good candidate for a micro-merchandisingstrategy.Micro-merchandisingconcernstheactivityoftargetingstorespecificcustomeraudienceswithtailoredranges,inordertomeetneedsmoreprofitablyatthelocallevel.Micro-merchandisingcombinesthevariable nature of retail space, in terms of how large the store is and where it is located, with the variable nature of customers, in terms of their purchasing behaviours.

Micro-merchandising relies on using customer information, captured and enabled by loyalty schemes and databases. Customer information is layered over store information, so that the real personality of the store emerges. Basket analysiscanbeperformedatstorelevel,toinformandinfluencestorerangingdecisions.Aproductthatmaybeapoorsellertoaretailchainoverall,maybeahighlyvaluedlinetospecificandprofitablecustomergroupsincertain stores. If the product is maintained in the offer, long-term customer satisfaction will be retained in spite of the individual poor product performance. Thus, it is the store’s personality traits that determine the core product ranges, and not the size; the size of the outlet determines the width and depth of the merchandise type that would appeal to the local customers. Stores are empowered with the merchandise that allows them to drive local market opportunities. Local suppliers can also be involved in the process of providing tailored products for individual store needs. As retailers offer more formats from which customers may choose to shop, format preferences and product preferences can be matched.

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SummaryHigh space productivity depends on offering the right range, in a logical layout, with products available and •easyforthecustomertofind.Space constraint applies to all retailers, but in non-store retailing the constraints are different.•The main constraint on the amount of space used in a virtual outlet is the attention span of the customer.•Space allocation also has an important role to play in communicating the retail brand. •When space is managed centrally, it helps a chain of retail outlets to achieve visual consistency, so that customers •are reassured by the similarity of the store layout and shelf appearance.Although space in a store outlet is 3D, retail space is often measured in square, rather than cubic units. •Measurementsofspacethataremorespecifictoindividualretailersmightbeuseful,suchasthenumberof•pagestobepublishedinacatalogueorthetotalnumberoffixturesavailableinanoutlet.Thetwoprincipalmeasuresofretailsuccessaresalesandprofits.•Salesvolumeandprofitabilitycanalsobemeasuredinrelationtotheamountofspaceusedtogeneratethose•levelsofsalesandprofits.Sales(orprofits)persquaremetreisacommonlyusedmeasureofretailspaceproductivity.•The amount of space will be determined to a greater extent on previous performance indicators, typically sales •values.If a category is growing, then more space should be allocated, whereas a declining category needs to have its •space rationalised.The numerical calculation of the selling areas is converted into a workable retail outlet layout at this stage.•High quality items, seasonal goods and the latest fashions are good choices for selling areas near entrances.•Thefinancialvalueofretailspaceisusuallyexpressedinsquaremetres.•Rent and local government rates are usually charged at a rate per square foot or metre, and although alternative •measures of retail space productivity are useful for retail product management, sales per square metre (sales density) is the measure most commonly used to compare the productivity of different retail outlets. Ground-level space ismorevaluable thanotherfloorsbecause it ismore inconvenient tocustomers toget•themselves to a different level. Customerflowcanalsobeencouragedbylocatinghighdemanditemsthroughoutthestorelayout,withplenty•of impulse items located in between.A logical route through the different product categories or departments is part of a customer focused offer, and •can encourage linked sales.The guiding principle is that the more a product sells, the more space it should be given.•Afastsellingitem(forexample,milk),however,maynotbeonethataretailermakesmuchprofitonandso•theymaydecidetoallocatemorespacetotheirprofitablelines.Space elasticity is not uniform amongst products, or across stores or departmental locations.•Cross-elasticity is the direct relationship between changes in the sales of product.•Long-termprofitabilitydependsoncustomerloyalty,whichisdependent(amongmanyotherthings)uponbeing•satisfiedwiththepresentationandassortmentofproducts.Seasonal products need to be allocated more and better space at their peak selling periods.•The product characteristics may determine its space allocation in terms of both quality and quantity of space.•Micro-merchandisingconcernstheactivityoftargetingstorespecificcustomeraudienceswithtailoredranges,•inordertomeetneedsmoreprofitablyatthelocallevel.


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ReferencesVarley, R., 2006. • Retail Product Management: Buying and Merchandising, 2nd ed., Routledge.Sharma, M., 2009. • Product Management: Product Lifecycles & Competitive Marketing Strategy, Global India Publications.FICO, • Retail Space Planning and Optimization [pdf] Available at: <http://www.artelys.com/uploads/pdfs/Xpress/retail_space_planning_optimization_2335ms.pdf> [Accessed 23 April 2012].isnare, • Category Management and Space Allocation [Online] Available at: <http://www.isnare.com/?aid=1042047&ca=Business+Management> [Accessed 23 April 2012].projectcaem, 2009.• Shelving Systems and Space Management [Video Online] Available at: < http://www.youtube.com/watch?v=RZbf00kjzOc > [Accessed 23 April 2012].discoverdbr, 2010. • Retail Space and Inventory Optimization. [Video Online] Available at: <http://www.youtube.com/watch?v=Uv21SIq9t48> [Accessed 23 April 2012].

Recommended ReadingGilbert, 2003. • Retail Marketing Management, Pearson Education India. Berman, 2007. • Retail Management: A Strategic Approach, 10/E, Pearson Education India.Dunne, P. M., Lusch, R. F. & Carver, J. R., 2010. • Retailing, Cengage Learning.

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Self AssessmentThe main constraint on the amount of space used in a virtual outlet is the _____of the customer.1.

attention spana. demandb. variable naturec. budgetd.

The total amount of space is measured in stage ______ of the space management process.2. firsta. secondb. thirdc. fourthd.

The two principal measures of retail success are sales and _________.3. profitsa. expensesb. sales volumec. retail spaced.

Sales(orprofits)________isacommonlyusedmeasureofretailspaceproductivity.4. per square centimetrea. per square inchb. per square meterc. per square feetd.

Sales per square metre is known as _________.5. sales productivitya. sales densityb. retail space productivityc. space qualityd.

Areas of a retail outlet that are particularly effective places for selling are _______.6. entrancesa. payment areasb. hotspotsc. destination product areas d.

Whichoftheseiseasytoaccessandwillindicatelocalpreferencesandinfluences?7. Historical sales dataa. Market shareb. Projected salesc. Productprofitd.


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The ___________may determine its space allocation in terms of both quality and quantity of space.8. seasonalitya. customer characteristicsb. product characteristicsc. fixturelimitationsd.

Which of the following statements is true?9. All space in a retail outlet is accessible by customers.a. Pester power refers to children’s ability to nag their parents into purchasing items they may not otherwise b. buy.Heavy and hazardous products should be located on high shelves because of the increased danger and c. difficultyofhandlingforcustomers.Seasonal products should not be allocated more and better space at their peak selling periods.d.

Which of the following statements is false?10. Long-termprofitabilitydependsoncustomerloyalty,whichisdependent(amongmanyotherthings)upona. beingsatisfiedwiththepresentationandassortmentofproducts.Cross-elasticity is the direct relationship between changes in the sales of product.b. Space elasticity is uniform amongst products, or across stores or departmental locations.c. Allocating space according to a measure of sales assumes that there is a relationship between the amount d. of space and the rate of sales.

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Chapter VIII

Visual Merchandising

Aim


definevisualmerchandising•

describe visual merchandising planning systems•

enumerate local and centralised approaches to visual merchandising•

Objectives


definegondolas•

describe different types of displays•

identifythedifferenttypesoffixtures•

Learning outcome


state the different types of store layouts•

explain window displays•

describe product presentation in a retail store•


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8.1 IntroductionVisual merchandising is a commonly used term for the aspect of product management concerned with presenting the product within a retail outlet to its best advantage. After all the product management work that has gone into planning the ranges, selecting the products, liaising with suppliers and getting the physical product through the supply chain, the product now enters into customer space. Visual merchandising combines a commercial approach with a design approach within the store environment. It helps to achieve operational product management objectives; maximising the efforts of the buying teams by giving the product the best opportunity to sell. Visual merchandising blends with the store design to create an environment that sends out strategic messages to consumers in order to reinforce the brand values of the retailer.

Visual merchandising is the art of attracting patrons with visual cues, is central to a retailer’s ability to generate sales. Visual merchandising got its start at the turn of the century, when department stores began using theatrical set design and lighting to create exotic displays. Today, the way the departments are arranged, the location of the escalators, the lighting, all are carefully planned to earn the store more sales per square foot.

8.2 The Scope of Visual MerchandisingVisual merchandising encompasses a wide range of activities; across all retail sectors. Fashion and home furnishings have always devoted considerable resources to display, but even in a grocery superstore elements of visual merchandising can be found. Some grocery retailers have used visual merchandising as a way of providing interest to the customer and as a way of differentiating themselves from their competitors. New computerised planning systems allow space management to combine visual display objectives with space productivity objectives. Retail outlets have to look good if they are to retain an increasingly style conscious customer base. The following should be considered:

Choiceoffixturesandfittingstobeused•Method of product presentation•Construction of ‘off-shelf’ displays•Choice of store layout (to encourage complementary purchases)•Use of point of sale material (to encourage impulse purchases)•Construction of window displays•

8.3 Visual Merchandising Planning SystemsLike most other areas of retail management, IT applications are helping to improve the visual merchandising process. They are helping to forge stronger links between product range planning, space allocation and product presentation. A fully integrated visual merchandising system such as Compass Software’s SmartVM can provide store personnel access to space planning visualisations via a corporate internet. This system can be used by buyers and merchandisers astheybuildrangesforthenextseason,andthenwhenfinalisedandreadyfordeliveryphotographicqualityvisualguidelines can be effectively and quickly communicated throughout the retail business. The improved quality of the output of this type of system will be particularly helpful for fashion buyers when presenting their ranges within afloorplancontext,helpingstorepersonneltounderstandproductlinkages.

8.4 Responsibility for Visual Merchandising within the Retail StructureResponsibility for this part of product management varies between retail organisations. In some retail organisations, a team of brand managers co-ordinates visual merchandising with other promotional activities, so that it becomes part of the marketing activities. The elements of visual merchandising (particularly the use of point of sale material and photographic imagery) are referred to as ‘in store advertising’.

Advertising refers to communications that are transmitted via paid media, such as magazines or television. Therefore, a retailer using their own imagery within the store cannot strictly be counted as advertising. However, the retail environment is a place where manufacturers display various types of branded materials, which again appear to be advertisements. The extent to which a manufacturer pays the retailer for this privilege can vary from nothing to a

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considerable, but probably undisclosed, sum. The term ‘ambient media’ refers to the various ways in which messages aboutproductsandservicescanappearinasellingenvironment,butdonotfallintothetraditionaldefinitionofadvertising. A visual merchandise manager, supported by area teams, is a format frequently used in multiple retailers. Visual merchandising at the implementation level is a creative activity and usually attracts people with a design trainingorbackground,althoughspecifictrainingforthisaspectofretailingisavailable.

8.5 Visual Merchandising as a Support for a Positioning StrategyIn an increasingly saturated and competitive retail environment, visual merchandising is a way of communicating and differentiating the retail offer. It must be an integral part of any strategy in which a retailer attempts to position or re-position the retail offer in the mind of the consumer. Visual merchandising is used by multiple retailers to strengthentheretailbrand,butahighlycentralisedandinflexibleapproachtovisualmerchandisingmaynotbeappropriate in all circumstances.

Fig 8.1 Visual merchandising: Local and centralised approaches

8.6 Fixtures and FittingsThe way products need to be presented and displayed within the store will largely determine the choice of fixturing.

Straight rackThestraightrackholdsalotofapparel.Itishardtofeaturespecificstylesandcoloursandfoundoftenindiscountand off-price stores.


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Fig. 8.2 Straight rack (Source: http://jdv-trc.blogspot.in/2009/04/master-class-homebase-focus-on.html)

GondolasThe term gondola refers to a system of shelving which offers stacked merchandise to the customer in a longitudinal presentation. The gondola is used in the ‘grid format’ where consumers move along aisles between gondolas, which offer merchandise on both sides. The end of the gondola is particularly effective in attracting customers to products as they slow down to turn the corner to view merchandise on the other side. Some gondolas are made up of a number offixturemodulesthatgiveflexibilityintermsoffixturesizing,andtheopportunitytoaltertheconfigurationofshelving. Gondolas are versatile. These are available in grocery and discount stores. It is hard to view apparel as they are folded.

Fig. 8.3 Gondolas(Source: http://jdv-trc.blogspot.in/2009/04/master-class-homebase-focus-on.html)

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RoundfixturesRoundfixtureoffersmerchandiseinacircularpresentation.Themerchandisemightbehungonaseriesofprongs,asinthecaseofbeltsorbubblepackedproducts,orthefixturemaybeamoresolidstructure,showingthevarietyavailableinamerchandisetype.Gapusethistypeoffixturingtoshowallthecoloursavailableinbasictopsorsweaters.Roundfixturesareusefulforshowingavarietyofmerchandisewithinonecategory,buttheyarenotveryspaceefficientbecausecustomeraccessisneededfromallsides.Roundfixturesaresmallerthanstraightrackand hold a maximum amount of merchandise. It is easy to move around and customers can get frontal view of merchandise.

Fig.8.4Aroundfixture(Source:http://cormans.com/gallery/round-fixtures/)

Four-wayfixturesFour-wayfixtures offer the retailer flexibilitywhen a degree of co-ordination is needed.Thefixture offers acombinationoffrontfacingmerchandisepresentation,with thespaceefficiencyofsidehanging.Thefour-wayprovidestheopportunitytopresentawidevarietyofmerchandiseandismorespaceefficientthanaroundfixture.Four-wayfixturesholdslargeamountofmerchandiseandallowscustomerstoviewentiregarment.


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Fig.8.5Afour-wayfixture(Source:http://www.franklinfixtures.com/cgi-bin/showimage.cgi?image=081.jpg)

ShelvingWall space is useful for incorporating the general display of merchandise within the overall interior design of the store. Casual clothing retailers, for example, often use wall shelving to house large quantities of merchandise, stacked fromfloortoceiling,whilstofferinginterestbyshowingallthealternativecoloursandshadesofdenim.Gondolasin various shapes and sizes incorporate shelving to accommodate different types of product.

RailsRailscanbemountedontowalls,orincorporatedintoafreestandingfixture.Heightflexibilitycanbeintroducedusingadjustablerailsandmodularrailfixturesprovidelongitudinalvariations.Cascadingrailsimprovetheappearanceof forward-facing hanging garments, and allow the customer better access to the product.

Bins, baskets and tablesBins and baskets are normally used to house large quantities of merchandise. They are effective for small items andforheapsofpromotionalmerchandise.Theymaybefilledwithonetypeofproduct,orthecustomermaybeinvited to look through a variety of products retailing at a particular price point. Promotional merchandise can also bestackedontables,whichprovideflexibilityintermsofspaceallocationanddisplayarea.However,tablescanalso be used in a more elegant display of product.

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Fig. 8.6 Displays using tables and baskets(Source: Varley, R., 2006. Retail product management buying and merchandising, 2nd ed., Routledge.)

The increased use of self-service in retailing has meant that the use of drawers and cabinets has decreased, but they may still be used for very functional merchandise that does not really need displaying or in instances where merchandise needs protection. For example, traditional hardware stores that sell loose items rather than pre-packaged keep this type of merchandise in drawers.

Watches and jewellery are often housed in glass cabinets in order to prevent damage and theft. Many retailers have theirowncustomisedfixturingandtheirowncustomisedterminologyforit.Fixturingshouldhaveadegreeofco-ordination through the store, so that they can be considered in ‘families’, using the same type of materials, whether itischrome,wood,acrylicorglassandthesamesetofdesignfeatures.Newdesignsforfixturesoftenincorporatelighting within the structure so that merchandise on display can be highlighted without the need for spot lighting fromwallsorceilings.Fixturingalsoneedstobeflexible,sothatanever-evolvingproductrangecanbesuccessfullyaccommodated. Many modern systems are modular which enables a great number of alternative combinations to be built.

Fig. 8.7 Fixture with integral lighting(Source: Varley, R., 2006. Retail product management buying and merchandising, 2nd ed., Routledge.)


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8.7 Product PresentationThewayinwhichproductsarepresentedasroutinewilldependonthetypeoffixtureavailablebutessentiallycaninclude:

Vertical stacking - for magazines or CDs•Horizontal stacking - tinned foods or folded garments•Hanging - on hangers or hooks•Hanging - mounted on card or bubble packed•

Merchandise presentation is largely determined by product category or end use of product, but in some instances, other product characteristics may bear a relation to the presentation method. Colour, for example, is often used effectively, and many clothing and home furnishings retailers incorporate a corporate colour palette into the buying plan so that different product categories can be presented together. Retailers may group merchandise together according to price levels or even sizes. Price lining can be used both to plan merchandise assortments and provide guidelines for display. There may also be a case for grouping products according to levels of technical involvement. The customer is faced with gradually increasing product complexity as he or she moves through the store.

Product presentation can instigate a number of issues for other members of the product management team. Fixturing maydeterminethesizevariationaretaileroffers,forexampleasmallconveniencestoremaynotfinditpracticalto stock family-size cereal packets as they require such all shelves; it would be preferable in this type of retailer to offer a smaller pack size and another product item in the same available space. The method of presentation may also determine the packaging or ‘get up’ of the product; for example, a folded shirt is likely to need board and pins, or a paper sash around it to keep it looking neat, but all these add to the cost of the item. Small items, such as stationery products,aremuchmoremanageablewhenbubblepackedormountedoncardandhungonawallfixture.Newapproaches to point of purchase presentation methods have been part of the orientation towards category management in the management of customer demand.

8.8 Store layoutVisualmerchandisingalsoencompassesthedesignofastorelayout.Astorelayoutwillbeheavilyinfluencedbythe assortment and variety on offer and will be constrained by the size and structure of the shop itself. The layout usedwillalsodetermineorbedependentonthetypeoffixturingused.Thereareanumberofdifferentapproachesto store layout, although they are all designed with the intention of moving customers to every area in the store in order to expose them to the full range of products. Store layouts are to encourage customer exploration and help customersmovethroughthestores.Oneshouldusealayoutthatfacilitatesaspecifictrafficpatternandprovideinteresting design elements.

Grid layoutAcommonstorelayouthasfixturespositionedintheformofagrid.Thismethodmaximisestheusethatcanbemade of the available space and provides a logical organisation of the products on offer. A grid layout is:

Easy to locate merchandise•Allows more merchandise to be displayed•Costefficient•Used in grocery, discount, and drug stores•

However,itisrathermechanicalinitsapproach,androwsofgondola-typefixtureswithaislesbetweenthemcanlack interest. It does not encourage customers to explore store since there are limited site lines to merchandise.

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Fig. 8.8 Grid store layout(Source: http://www.scribd.com/doc/77626651/4/Merchandising)

Free-Form LayoutAnalternativeapproachistoplacethefixturesinamorerandompattern.Thistypeoflayoutisappropriatewhenvarietyinthefixturingisneededandwhentheshoppingprocessinvolvesbrowsingratherthanamoresystematicproduct selection process. Free form layout can successfully incorporate a mix of small gondolas, hanging rails and shelving units. The product areas in a free-form layout should not be too large or too deep, to prevent customers from feeling trapped. A free-form layout:

Hasfixturesandaislesarrangedasymmetrically•Provides an intimate, relaxing environment that facilitates shopping and browsing•Is used in specialty stores and upscale department stores•

However,thereisinefficientuseofspace.Itismoresusceptibletoshoplifting;salespeoplecannotviewadjacentspaces.


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Fig. 8.9 Free-form layout(Source: http://www.scribd.com/doc/77626651/4/Merchandising)

Where the merchandise range is limited, or in situations where a high level of personal selling is desirable or necessary, a ‘boutique’ layout could be used. This layout surrounds the customer with merchandise, most of which is displayed inoronwallfixturing,withoneortwoothercentralfixturesofferinginterestor,perhaps,tohousethetill.

Racetrack layoutInlargerstoresadefiniteguidedwalkwayor‘racetrack’isincorporatedintothelayout,whichguidesthecustomerbetweenthemainclassificationsofmerchandise,whichareoftensetout infree-formorshortgridfixturing.Aracetrack layout:

Has a loop with a major aisle that has access to departments•Draws customers around the store •Provide different viewing angles and encourage exploration, impulse buying•Is used in department stores•

Modern layouts are generally more airy, with voids replacing walls and glass replacing solid partitioning. ‘Decompression zones’ are used to give shoppers time to relax and refocus their attention, for example at the front of the store, or near escalators. Vertical access and visibility is becoming increasingly important as a means of encouragingcustomerstomulti-levelretailspace,astheamountofavailablegroundfloorspacedecreasesinprimeshopping centre locations.

Designfortwo-waytrafficflow,theRacetrackpatterncreatesacircularflow,leadingyourcustomersfromthefrontdoor, around your store, and to the checkout counter. This type of pattern is design to maximise the number of end capsalongthestoretrafficroutethatwillenticecustomersfurtherintostoredepartments,encouragethemdowntheaislesofstorefixtures,andmakethemwanttostoptocheckoutthespecialtycirculardisplayracks.Departmentsset up with short runs of store shelving (12 to 24 feet) that lead customers to wall units or power aisles, or another racetrack. Higher margin items are placed in the center. Display cases, specialty racks, POPs, etc. are sprinkled

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throughout.

Fig.8.10Theracetrackapproachforretailstorefloorplan(Source:http://blog.handystorefixtures.com/retail-store-traffic-patterns/)

Complementary productsWithin the overall store layout, decisions concerning which categories of merchandise should be placed next to one another need to be made. This is where the principles of space allocation and store layout are intertwined. A store layout must provide logic to the customer, whilst helping the retailer to achieve its own objectives in terms of exposing the store visitor to as much of the product range as possible and to increase the value of the transaction of each customer. Product adjacencies are an important part of the space planning process within a retail outlet, so that related product purchasing opportunities can be maximised to full potential.

Visual merchandising may not only encourage complementary purchases, but it can also be used to encourage customers to ‘trade up’ by highlighting premium brands within a display. Customers may switch brands at the point of purchasing decision, or they may buy something on impulse because a display attracted their attention and created interest in the product. The use of ‘clip strips’ is to increase impulse purchasing.

Although the achievement of this kind of retailer objective might be viewed as a manipulation of customers, more and more shopping trips are made with only a vague plan or ‘list’. Introducing product suggestions on the shelf, or by virtue of the outlet layout, could be viewed as a provision of retail service; making the shopping experience easier and more convenient for the time pressured customer. In a department store, accessories will be located in theirowndepartmentforcustomerswhohaveaspecificpurchaseinmindandalongsidelargeritemslikesuitsorcoats in order to encourage impulse buying of related products.

8.9 DisplaysDisplays can normally be broken down into three different types: on-shelf displays, feature (or off-shelf displays) and window displays. On-shelf displays are the ‘normal’ displays around the store that show all the different variations of product on offer in some kind of logical sequence. The customer is normally free to interact with the product and make a self-service selection from the on-shelf display.

Feature (off-shelf) displaysThese displays are designed to have additional impact, by showing the product as it might be used, or perhaps alongside other products to suggest complementary purchases. This type of display can also be considered to be a visual feature that creates interest or excitement within the retail outlet. They might be placed on walls, within alcoves orattheendofafixturesuchasagondola.Whilston-shelfdisplayshavetocombinefunctionalitywithaestheticsensibility, many off-shelf displays are not used in the routine selling process and therefore can be constructed to makeasignificantvisualimpact.Theyareoftenverycarefullydesignedandartisticallyarrangedandonlychangedby the visual merchandising team. They may incorporate ‘props’, which are not part of the product range for sale, or they might be based on a body form or mannequin. In contrast, off-shelf displays are also used for promotional purposesandmaywellincorporateafixturesuchasadumpbin,whichoffersthefunctionalpurposeofhousinganincreased quantity of the promotional item with the visual impact of a high volume display.


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Fig. 8.11 Off-shelf display(Source: http://www.osbornepike.co.uk/shelf-life/issue-16/seal-the-deal)

Thethemeddisplaycanbeusedforalocalevent,likeatheatreproductionorafilmrelease,andiscommonlyusedfor seasonal purchases. Display props can be worked into the product theme.

Lifestyle displays offer the opportunity to incorporate a wide variety of products. For example, a display based on the theme of a barbecue could involve garden furniture – the barbecue itself, outdoor tables and loungers; kitchenware products – utensils, plastic crockery and tumblers, informal cutlery; essentials such as charcoal and matches; food produce such as marinades and sauces; accessories such as outdoor lighting and candles; and books on the subject of barbecue building or barbecue cookery.

Fig. 8.12 Themed display(Source: http://thevisualmerchandisingblog.wordpress.com/2011/03/05/11-examples-of-supermarket-themed-

display/)

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The‘classificationdominance’displayallowsaretailertoshowthatithasaverydeepassortmentofmerchandisewithinaclassification,orcategory.Attheoppositeendofthescale,adisplaycanbeveryeye-catchingifthesameproduct is used in a quantity that is much larger than normal. Tonnage merchandising is a type of display often used for in-store promotions.

Fig. 8.13 Tonnage merchandising(Source: Varley, R., 2006. Retail product management buying and merchandising, 2nd ed., Routledge.)

The co-ordinated display often uses a colour theme to connect the products being grouped together. It is quite common for lifestyle displays to be colour co-ordinated in order to create additional impact. For example, home furnishings retailers often use colour themes in both on-shelf and off-shelf displays to arrange their merchandise, rather than by grouping by product category. Other co-ordinating themes could be texture, style, or brand. Co-ordination can also be based around the end use of product, sometimes referred to as idea orientated displays. A single product or a small group of products are displayed in isolation, leaving the product and its juxtaposition with the space around it to create a visual impact. This type of display is most frequently used for products with prestige and high monetary value, because of the resource implication associated with a higher customer space to merchandise space ratio.

The principles of designAlthough the principles of design relate as much to the overall design of the store as a display within, it is perhaps appropriate to consider them in relation to product displays. A visual merchandiser generally employs more than one of the following principles in a display:

balance, whether symmetrical or asymmetrical•emphasis, including the use of size, repetition or contrast•proportion and scale•rhythm, including continuity, progression and alternation•harmony•

8.10 Window DisplaysWindow displays have a particularly important role to play in communicating to the potential customer what the retailer stands for in terms of product and shopping environment. Window displays make customers aware of the type of merchandise being sold, and hopefully will attract the interest of target customers. Window displays can be open, which allows the customer to see past the merchandise and into the shop. Alternatively, windows may be backed by partial or complete boarding, which allows the retailer to build promotional photography into the display ortocreatedramaticeffects.Materialanddesignelementsfromthestore’sinteriorwerereplicatedinthefixtures,which are constructed from aluminium tubes coated in an epoxy powder, with glass-effect acrylic shelves. The look is fully integrated, sleek and contemporary, and supports the retailer’s trendy brand identity.


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Some of the examples of visual merchandising are:Escalators are a focal point of the store. This makes them ideal location for promotional signs and for impulse •items like perfume.Cosmeticsareplacedatthemainentranceofthestore.Itisthemostprofitabledepartmentofthestore.These•goodies lead to impulse buys. Thus, these things include essential part of department design.Some items like watches are placed in glass case with lot of space around it. This implies real luxury.•

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SummaryVisual merchandising is a commonly used term for the aspect of product management concerned with presenting •the product within a retail outlet to its best advantage. Visual merchandising combines a commercial approach with a design approach within the store environment. •Visual merchandising blends with the store design to create an environment that sends out strategic messages •to consumers in order to reinforce the brand values of the retailer.Visual merchandising is the art of attracting patrons with visual cues, is central to a retailer’s ability to generate •sales. New computerised planning systems allow space management to combine visual display objectives with space •productivity objectives.The elements of visual merchandising (particularly the use of point of sale material and photographic imagery) •are referred to as ‘in store advertising’. Advertising refers to communications that are transmitted via paid media, such as magazines or television.•The term ‘ambient media’ refers to the various ways in which messages about products and services can appear •inasellingenvironment,butdonotfallintothetraditionaldefinitionofadvertising.A visual merchandise manager, supported by area teams, is a format frequently used in multiple retailers.•Visual merchandising is used by multiple retailers to strengthen the retail brand, but a highly centralised and •inflexibleapproachtovisualmerchandisingmaynotbeappropriateinallcircumstances.The gondola is used in the ‘grid format’ where consumers move along aisles between gondolas, which offer •merchandise on both sides.Roundfixturesareusefulforshowingavarietyofmerchandisewithinonecategory,buttheyarenotveryspace•efficientbecausecustomeraccessisneededfromallsides.Four-wayfixturesholdslargeamountofmerchandiseandallowscustomerstoviewentiregarment.•Wall space is useful for incorporating the general display of merchandise within the overall interior design of •the store.Cascading rails improve the appearance of forward-facing hanging garments, and allow the customer better •access to the product.Bins and baskets are normally used to house large quantities of merchandise.•Watches and jewellery are often housed in glass cabinets in order to prevent damage and theft.•Merchandise presentation is largely determined by product category or end use of product, but in some instances, •other product characteristics may bear a relation to the presentation method.Store layouts are to encourage customer exploration and help customers move through the stores.•Free form layout can successfully incorporate a mix of small gondolas, hanging rails and shelving units.•

ReferencesVarley, R., 2006. • Retail Product Management: Buying and Merchandising, 2nd ed., Routledge.Sharma, M., 2009. • Product Management: Product Lifecycles & Competitive Marketing Strategy, Global India Publications.Scribd, • Store Management [Online] Available at: <http://www.scribd.com/doc/77626651/4/Merchandising> [Accessed 23 April 2012].isnare, • Two Successful Traffic Flow Approaches for Retail Stores [Online] Available at: <http://blog.handystorefixtures.com/retail-store-traffic-patterns/>[Accessed23April2012].ipvideomarketing, 2008.• Dollar Store Fixtures used gondola shelving and store shelving [Video Online] Available at: <http://www.youtube.com/watch?v=2-Wb5UXeo1A&feature=related > [Accessed 23 April 2012].RetailTribe, 2010. • Merchandising BP: Visual Merchandising [Video Online] Available at: <http://www.youtube.com/watch?v=59SOHzC6zyA&feature=related > [Accessed 23 April 2012].


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Recommended ReadingGilbert, 2003. • Retail Marketing Management, Pearson Education India. Colborne, R., 1996. • Visual Merchandising: The Business of Merchandise Presentation, Cengage Learning.Dunne, P. M., Lusch, R. F. & Carver, J. R., 2010. • Retailing, Cengage Learning.

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Self AssessmentVisual merchandising is a commonly used term for the aspect of _________concerned with presenting the 1. product within a retail outlet to its best advantage.

product managementa. brand managementb. human resource managementc. marketing managementd.

What helps to achieve operational product management objectives; maximising the efforts of the buying teams 2. by giving the product the best opportunity to sell?

Visual merchandisinga. Complementary productsb. Tonnage merchandisingc. Classificationdominanced.

________are an important part of the space planning process within a retail outlet, so that related product 3. purchasing opportunities can be maximised to full potential.

Off-shelf displaysa. Product adjacenciesb. Themed displaysc. Gondolasd.

The term __________refers to a system of shelving, which offers stacked merchandise to the customer in a 4. longitudinal presentation.

classificationdominancea. tonnage merchandisingb. gondolac. visual merchandisingd.

The gondola is used in the ___________ where consumers move along aisles between gondolas, which offer 5. merchandise on both sides.

grid formata. race-track formatb. free-form layoutc. feature displaysd.

Which of these is not a feature of a free-form layout?6. Afree-formlayouthasfixturesandaislesarrangedasymmetrically.a. A free-form layout provides an intimate, relaxing environment that facilitates shopping and browsing.b. A free-form layout is used in specialty stores and upscale department stores.c. A free-form layout has a loop with a major aisle that has access to departments.d.

Which of these a feature of grid layout?7. A grid layout is easy to locate merchandise.a. A grid layout allows more merchandise to be displayed.b. A grid layout is used in grocery, discount, and drug stores.c. A grid layout provides different viewing angles and encourages exploration, impulse buying.d.


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What are used to give shoppers time to relax and refocus their attention at the front of the store, or near 8. escalators?

Decompression zonesa. Gondolasb. Visual merchandisingc. Product managementd.

Which of the following statements is false?9. Visual merchandising encompasses a wide range of activities; across all retail sectors.a. Visual merchandising is the art of attracting patrons with visual cues, is central to a retailer’s ability to b. generate sales.Visual merchandising blends with the store design to create an environment that sends out strategic messages c. to consumers in order to reinforce the brand values of the retailer.Visual merchandising combines a design approach with a commercial approach within the store d. environment.

Which of the following statements is false?10. Fashion and home furnishings have always devoted considerable resources to display, but even in a grocery a. superstore elements of visual merchandising can be found.Some grocery retailers have used visual merchandising as a way of providing interest to the customer and b. as a way of differentiating themselves from their competitors.New computerised planning systems allow space management to combine visual display objectives with c. space elasticity objectives.A fully integrated visual merchandising system such as Compass Software’s SmartVM can provide store d. personnel access to space planning visualisations via a corporate internet.

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Case Study I

Big Bazaar: The Brand Building Challenge

The Big Bazaar brand name is in its growth stage. Pantaloon group faced various small and large scales troubles in the introductory stage of the brand. Present years are the high growth in retail sphere as market has high potential to sustaingrowth.Thesalesareincreasing,moreandmorefirmsarecomingtomarkets,foreignplayersareenteringintoretailsectorandfinallypresenceoforganisedretailisincreasinginretailsector.

Factors that shaped Big Bazaar during its life cycleInfluenceofSarvanaStoreslocatedinTheyagrayaNagar,ChennaiMany people think that Big Bazaar was inspired by Wall Mart but the truth is that Kishore Biyani (KB) and his team members are neither inspired by US ways of doing retailing nor they have been to US much. The credit for foundation and inspiration goes to Saravana Store, a family –run 25 years old store, whose philosophy was – low margin, high turnover. In that store, food, groceries, clothes everything had a separate section. It had around 120 people just to manage crowd. The single shop was doing business of more than 200 crore per year. This shop was the template for Big Bazaar.

Observing customer regularlyRegularcustomerfeedbackisalsoaninfluentialfactorforthesuccessofBigBazaar.TheBigBazaarhasaseparateteam that looks for customer’s purchasing pattern and how they like or dislike products, how they approach to particular products. For example, unlike other stores where the most expensive and catchy item is placed at the front display, Big Bazaar places the “Value for Money Item” at check out point.

Imbibed entrepreneurial spirit in organisationDecision making power is given to every level of employee at Big Bazaar. KB has given risk-taking power, which led to entrepreneurial spirits into every employee. Everybody in big Bazaar operates with speedandconfidencewhenitcomestodecisionmaking.

Building on core valuesCore values of Indianness, valuing and nurturing relationships and simplicity shaped the brand. Kishore Biyani always believes in long term relationships, with customers, suppliers and employees. Once thinking about offering gifts to employees close to Diwali, KB suggested giving those wall-paints to keep their house clean. The paint is used in Indian culture to keep house clean and brings freshness. The motive behind was to keep everything clean and bring freshness in organisation.

Strategic decisions taken to build the Big Bazaar brand The strategic decisions that lead to building of Big Bazaar were:-

Real estate gameFor a retailer, location is one of the most important things. According to KB, real estate cost should be less than 5 %oftotalsalesofstoreinordertoprovidemaximumbenefitstocustomer.Thestrategicdecisionstosecurespacesbefore other retailers join in have resulted in cost-saving. Also, it has created early presence in market.

Nurturing relationshipsKB follows strategy to develop trust and nurture relationships with suppliers. This trust led to strategically correct decisions most of the time. Whoever works with Future Group, either leaves in initial deals or continues forever. Use of technology, scenario planning and story-telling Big Bazaar planning and design used advance technologies like scenario planning and storytelling. These techniques were mainly used for store-design layout, store-location selection. The strategy to use user focused, prototype-based development tool made the brand adapt to the fast changing external environment.


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Design managementDesign-ledthinkinghelpedBigBazaartoachieve‘customer-first’objectiveandultimatelyleadtobetterfinancialperformance. Big Bazaar strategy to focus on design led to creation of Idiom, an independent design and consultancy firm,based inBangalore.Theyareoneof thefeworganisations in Indiahavingeconomist,ethnographersandsociologists working across various teams as a part of Design management team. Back-end operations, supply chain Harvard Business School just did a case study on Pantaloons’ supply chain and it says that Pantaloons’ is themostcost-effectivesupplychainintheworld.Indiamaynothaveamodernsupplychainbutitdefinitelyhasacost-effective one. Retailers have made use of the existing supply chain.

(Source: Introduction to store operations: unit 1 [Online] Available at: <http://www.egyankosh.ac.in/bitstream/123456789/39072/1/Unit-1.pdf> [Accessed 19 April 2012])

QuestionsThe credit for foundation and inspiration of Big Bazaar is given to a 25 years old store. Justify.1. Answer: The credit for foundation and inspiration goes to Saravana Store, a family –run 25 years old store, whose philosophy was – low margin, high turnover. In that store, food, groceries, clothes everything had a separate section. It had around 120 people just to manage crowd. The single shop was doing business of more than 200 crore per year. This shop was the template for Big Bazaar.

Enumerate the factors that shaped Big Bazaar during its life cycle.2. Answer: The factors that shaped Big Bazaar during its life cycle are:InfluenceofSarvanaStoreslocatedinTheyagrayaNagar,Chennai•Observing customer regularly•Imbibed entrepreneurial spirit in organisation•Building on core values•

How nurturing relationships with suppliers can be considered as a strategic decision taken to build the Big 3. Bazaar brand?Answer: KB follows strategy to develop trust and nurture relationships with suppliers. This trust led to strategically correct decisions most of the time. Whoever works with Future Group, either leaves in initial deals or continues forever. Use of technology, scenario planning and story-telling Big Bazaar planning and design used advance technologies like scenario planning and storytelling. These techniques were mainly used for store-design layout, store-location selection. The strategy to use user focused, prototype-based development tool made the brand adapt to the fast changing external environment.

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Case Study II

SAGIT–UNILEVERSagit is part of the multinational conglomerate Unilever, and is the leading frozen food supplier in Italy where frozen food is a growing market; traditionally it has had a low market penetration because of the availability of fresh alternatives, and a lack of consumer interest. However, as the quality of frozen foods has improved, Italian consumers have started to favour their convenience from the points of view of storage, meal preparation and waste avoidance. Sagit has been involved in a number of category management projects with its retail trading partners. As in other projects, Sagit, as the supply partner, has been able to bring a wealth of information to the category management discussion on the way consumers behave. This information, derived from a number of marketing research projects, is summarised below:

Impulse purchasing for frozen foods is low•Many customers in general grocery shopping trips do not buy frozen food at all•Customers who buy frozen foods buy very few products (for example only two or three products are selected •from a product assortment of over 250)Frozen food buyers are store loyal rather than brand loyal•Store promotions were found to be the most effective form of product promotion, due to the lack of brand •loyalty.

The objective of Sagit’s category management project with Italian retailer GS was to improve the performance ofthewholecategory,therebyofferingmutualbenefitstobothretailandsupplypartners.Thestartingpointwasto establish which products were to be grouped as a category. To perform this task adequately, the way in which consumers approached frozen products with a view to selection was investigated. This resulted in products being groupedaccordingtotheirprimaryingredient(forexample,meat,fishorvegetable)andthenaccordingtotheirfunction (for example, ready prepared meals, pre-prepared meal components, fancy sweet dishes and fancy savoury dishes).

The second stage of the project involved a review of the product assortment. This resulted in some changes to the product range:

A more prominent selection from leading brands, including key product items•Eliminationofnon-profitableitemsandthosewithaverymarginalcontributiontosalesorprofits•Introduction of 16 new products and the removal of 57 existing products.•

Thethirdstageinvolvedspacemanagement–regardingthelayout,fixturing,displayandallocationofshelfspace to products:

Displayingtheproductaccordingtothecategoriesofmerchandisedescribedearlierinthecategorydefinition•stage, by natural product and then by useAverticalpresentationofproducts,asopposedtotheirlyingflat•Clearer product information•Alternative placement of high turnover and low turnover goods to encourage shoppers to consider all products •within the assortmentPlacing products with a high propensity to be impulse purchased in more visible and busy display areas•Placing products that are more inclined to be pre-planned purchases in areas that require customers to cover a •larger proportion of the displayOtherspaceallocationdecisionsweredeterminedbysalesandprofitobjectives,thesizeoftheSKU,stock-turn•and lead times.


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Thefinalstageinvolvedin-storecommunications:Pointofpurchasematerialhelpedtodefinethecategoryasapleasantenvironment,forexampleawelcome•garland was placed at the start of the departmentClear price marking was applied throughout•The sub-categories were clearly marked in the section of the display•Specificproductorientatedpointofpurchasematerialwasusedtoreinforcethebrandleadershipofsagit’s•(findus)products.

The results of the project were very encouraging; in particular for Sagit and their retail partner SG. Annual sales for the whole category improved by 5 per cent (compared to a market growth for frozen foods of 2 per cent). Sales of Sagit products increased by around one-third, and sales of SG’s own branded products increased by nearly 40 per cent.Otherbrandswithinthesectionexperiencedstableordecreasedsalesvolumes.Therewereadditionalbenefitsthatwereidentifiedbyqualitativeresearchafterimplementationofthecategorymanagementinitiatives.Generallythe visibility of the category had been greatly improved: 98 per cent of customers noticed the new displays and in-store communications, and were very positive about the ease and pleasantness of the shopping experience within the department. They also considered the general organisation of the department to be improved, along with the clarity of the displays, the visibility of items, prices and promotions.

(Source: Varley, R., 2006. Retail Product Management: Buying and Merchandising, 2nd ed., Routledge)

QuestionsHow did the review of the product assortment result in some changes to the product range?1. Describe in-store communications by Sagit.2. Explain the space management by Sagit.3.

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Case Study III

RGIS Pilots Space Optimisation Solution for Family DollarCompany overviewFamily Dollar, a successful Retail chain with more than 6,700 stores, located from Maine to Arizona, offers consumers a wide array of products, shopping convenience and everyday low prices.

ProblemFamily Dollar stores vary in size and product assortments. Although, Family Dollar conducts store surveys on a project basis for remodels, there was a need to collect spatial data for purposes of evaluating performance and determining coursesofactionrelatedtomerchandiseassortmentsandallocationofsellingfloorspace.Therewasnofacilityforthe central repository of information across the chain or a market. This created two primary challenges:

Evaluation of product placement and adjacencies in specific stores and formatswas difficult to track and•manageThere was limited visibility to understand and prioritize both large and small-scale space re-alignments•

SolutionRGIS and Family Dollar collaborated on a pilot program for the Baltimore, Maryland store locations in order to mapthestoreplanogram,determinethegapbetweenactualfixtureandproductplacementandtherealogramandprovideanaccuratefloorplanforfixturingandcurrentspaceallocation.Theobjectivesofthepilotincluded:

Providing an analytical platform to more effectively evaluate space allocation and layout decisions•Enablingfasterexecutionthroughtheuseofimprovedstoreplanningtoolsandfixtureorderingprocesses–and•eliminatingtheneedtosurveyeachspecificstore

In mapping the pilot stores, RGIS used Smartspace™, an innovative suite of macro space planning solutions, designedtooptimizetheuseofavailablespace.Specifictoolsincluded:

Smartspace™ StorViewer™ – a powerful space planning, reporting and collaboration tool. StorViewer™ •can be utilised by all levels of an organisation – from store management to the C-suite – to create chain-wide analysis, reporting and heat maps. By connecting to a central store database over the internet or company intranet,StorViewer™allowsmanagementtoevaluatespecificstoreperformanceandidentifyimprovementopportunities across the organisation.Smartspace™ StorPlanner™ – an intelligent retail planning and space management application. StorPlanner™ •enables retailers to evaluate the effectiveness of store layouts at the individual store, within clusters/geographies oracrosstheenterprise.TheuseofStorPlanner™canresultinsignificantproductivityimprovementsinthemanagement and allocation of store space.

In order to populate the Smartspace™ StorPlanner™ database, RGIS used its proprietary data collection tool to validateandupdateeachstore’sAutoCaddrawingandassociateplanogramstoeachfixturesectionineachstore.

ResultsThrough the collaborative pilot, Family Dollar was able to gain increased visibility into the store layout, product adjacencies and opportunities for enhancing available space.

Family Dollar’s Vice President, Format and Space Management reports: “Through this pilot, we were able to gain greater intelligence about the space in our stores allowing us to make better decisions about how to use that space. With a space optimization tools StorPlanner™ and StorViewer™, we can make faster, high quality decisions to ensureourstoresareeasytoshopforourcustomersandthatthey’reabletofindwhattheyneedquickly.”

(Source: Case Study - Family Dollar [Online] Available at: <http://www.rgis.com/us_en/services/smartspace/casestudies/2010/discount-retail.aspx> [Accessed 19 April 2012])Questions


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What were the problems faced by Family Dollar stores?1. Enumerate the objectives of the pilot program for the Baltimore Maryland store locations by Family Dollar and 2. RGIS collaboration.Which tools were used by RGIS in mapping the pilot stores?3.

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Referencesarifirfanullah, 2011.• CFA Video Real Estate.mp4 [Video Online] Available at: <http://www.youtube.com/watch?v=4VIgjCtNpPQ> [Accessed 23 April 2012].arifirfanullah,2011.• Multi-Channel Retail Strategy: What Makes Consumers Tick? [Video Online] Available at: <http://www.youtube.com/watch?v=4VIgjCtNpPQ> [Accessed 23 April 2012].bluesphereav, 2010. • Digital Menu Board Sample Layouts Digital Signage System Blue sphere [Video Online] Available at: <http://www.youtube.com/watch?v=mYTEMIcTrT4&feature=related> [Accessed 23 April 2012].Chapter 6 Web, Nonstore-Based, And Other forms of Non-traditional Retailing • [pdf] Available at: <http://wps.pearsoncustom.com/wps/media/objects/2471/2530883/MCH120_Ch06.pdf> [Accessed 23 April 2012].craigbur1, 2009.• Content for Digital Signage - Quick Service Restaurant Menu Board [Video Online] Available at: < http://www.youtube.com/watch?v=59hdDOCMw-0&feature=related> [Accessed 23 April 2012].davidhall60, • Multi-channel retailing [Video Online] Available at: <http://www.youtube.com/watch?v=O9_ro6f8qso> [Accessed 23 April 2012].discoverdbr, 2010. • Retail Space and Inventory Optimization. [Video Online] Available at: <http://www.youtube.com/watch?v=Uv21SIq9t48> [Accessed 23 April 2012].FICO, • Retail Space Planning and Optimization [Online] Available at: <http://www.artelys.com/uploads/pdfs/Xpress/retail_space_planning_optimization_2335ms.pdf> [Accessed 23 April 2012].Galaty, F. W. Allaway, W. & Kyle, R. C., 2002. • Modern Real Estate Practice, Dearborn Real Estate. hannebjorn, 2011. • 21st Century Multi Channel Retail [Video Online] Available at: <http://www.youtube.com/watch?v=FNncMO9lIqY> [Accessed 23 April 2012].Helsinki School of Economics, 2010. • Category management and captainship in retail. Case: Baby food in Finland [pdf]Availableat:<http://hsepubl.lib.hse.fi/FI/ethesis/pdf/12203/hse_ethesis_12203.pdf>[Accessed23 April 2012].India in Business, • Retailing [Online] Available at: <http://www.indiainbusiness.nic.in/industry-infrastructure/service-sectors/retailing.htm> [Accessed 23 April 2012].Investopedia. • Exploring Real Estate Investments [pdf] Available at: <http://i.investopedia.com/inv/pdf/tutorials/ExploringRealEstateInvestments.pdf> [Accessed 23 April 2012].ipvideomarketing, 2008.• Dollar Store Fixtures used gondola shelving and store shelving [Video Online] Available at: <http://www.youtube.com/watch?v=2-Wb5UXeo1A&feature=related > [Accessed 23 April 2012].isnare, • Category Management and Space Allocation [Online] Available at: <http://www.isnare.com/?aid=1042047&ca=Business+Management> [Accessed 23 April 2012].isnare, • Two Successful Traffic Flow Approaches for Retail Stores [Online] Available at: <http://blog.handystorefixtures.com/retail-store-traffic-patterns/>[Accessed23April2012].Jacobus, C., 2009. • Real Estate: An Introduction to the Profession, 11th ed., Cengage Learning.Lynn, D. L. & Wang, T., 2010. • Emerging Market Real Estate Investment: Investing in China, India, and Brazil, John Wiley & Sons.McGraw-Hill/Irwin, • Store Layout, Design, and Visual Merchandising [pdf] Available at: <http://www.cerritos.edu/blivingston/ba123/ppt/Chap018.pdf > [Accessed 23 April 2012].MortgagesInVancouver, 2010. • Top 3 Real Estate Investment Strategies - The Good, Bad and the Profitable [Video Online] Available at: <http://www.youtube.com/watch?v=csUvFaBDMDs> [Accessed 23 April 2012].Mukherjee, A. & Patel, N., 2005. • FDI in Retail Sector, India, Academic Foundation.Pradhan, 2009. • Retailing Management 3E, 3rd ed., Tata McGraw-Hill Education.projectcaem, 2009.• Shelving Systems and Space Management [Video Online] Available at: < http://www.youtube.com/watch?v=RZbf00kjzOc > [Accessed 23 April 2012].


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Ray, 2009. • Supply Chain Management for Retailing, Tata McGraw-Hill Education.researchonindia, 2012. • Top Facilities Management Services Market in India 2012 - Sample.mp4 [Video Online] Available at: <http://www.youtube.com/watch?v=tmHFDZmiaZs > [Accessed 23 April 2012].RetailTribe, 2010. • Merchandising BP: Visual Merchandising [Video Online] Available at: <http://www.youtube.com/watch?v=59SOHzC6zyA&feature=related > [Accessed 23 April 2012].Roy, A., 2009. • Introduction to category management and assortment planning in retail industry, KINDUZ Business Consulting.Scribd, • Store Management [Online] Available at: <http://www.scribd.com/doc/77626651/4/Merchandising> [Accessed 23 April 2012].Sharma, M., 2009. • Product Management: Product Lifecycles & Competitive Marketing Strategy, Global India Publications.Singh, V., 2009. • Prospects & Problems of Real Estate in India [pdf] Available at: <http://www.eurojournals.com/irjfe_24_21.pdf> [Accessed 23 April 2012].Sonia, S., • Real Estate Sector - The India Story [pdf] Available at: <http://www.prres.net/papers/Sonia%20_Real_Estate_Sector_The_India_Story.pdf > [Accessed 23 April 2012].stntraining, 2011.• Basics of Category Management [Video Online] Available at: <http://www.youtube.com/watch?v=Lxfi3hnLZv4>[Accessed23April2012].thegaurdian, • John Lewis and Kingfisher show profits, but not optimism [Online] Available at: <http://www.guardian.co.uk/business/2010/sep/16/john-lewis-kingfisher-profits>[Accessed23April2012].UPS Supply Chain Solutions SM, • Building a Category Management Capability [pdf] Available at: <http://www.ups-scs.com/solutions/white_papers/wp_category_mgt.pdf > [Accessed 23 April 2012].Varley, R., 2006. • Retail Product Management: Buying and Merchandising, 2nd ed., Rouledge.webesomar, 2007. • S. Needel - What’s the future of category management? Part 1 [Video Online] Available at: <http://www.youtube.com/watch?v=Ss8Dn8_BZu0> [Accessed 23 April 2012].

Recommended ReadingA.C. Nielsen Company, Karolefski, J. & Heller, A., 2005. • Consumer-Centric Category Management: How to Increase Profits by Managing Categories Based on Consumer Needs, John Wiley & Sons.Berman, 2007. • Retail Management: A Strategic Approach, 10/E, Pearson Education India. Bhatia, S. C., 2008. • Retail Management, Atlantic Publishers & Dist. Chiplunkar, 2011. • Product Category Management, Tata McGraw-Hill Education.Colborne, R., 1996. • Visual Merchandising: The Business of Merchandise Presentation, Cengage Learning.Dunne, P. M., Lusch, R. F. & Carver, J. R., 2010. • Retailing, Cengage Learning.Ebster, C. & Garaus, M., 2011. • Store Design and Visual Merchandising: Creating Store Space That Encourages Buying, Business Expert Press.Galaty, F. W. Allaway, W. & Kyle, R. C., 2002. • Modern Real Estate Practice, Dearborn Real Estate. Gilbert, 2003. • Retail Marketing Management, Pearson Education India. Grewal, 2011. M• arketing, Tata McGraw-Hill Education.Krafft, M. Murali K. & Mantrala, M., 2010. • Retailing in the 21st Century: Current and Future Trends, Springer.Lamba., 2002. • The Art of Retailing (Book Only), Tata McGraw-Hill Education.Levy, M. & Weitz, B. A., 2008. • Retailing Management, McGraw-Hill Irwin.Madaan, 2009. • Fundamentals of Retailing, Tata McGraw-Hill Education. Mehrotra, N., 2007. • Indian Retail Sector - A Primer, ICFAI Books. Palit, A. & Bhattacharje, S., 2008. • Special Economic Zones in India: Myths and Realities, Anthem Press.

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Pradhan, S., 2006. • Retailing Management 2E, Tata McGraw-Hill Education.Reilly, J. W., 2000. • Language of Real Estate, Dearborn Real Estate.Tyson, E. Griswold, R. S. & Griswold, Robert S. MBA., 2009. • Real Estate Investing For Dummies, John Wiley & Sons.Ventolo, W. L. & Williams, M. R., 2001. • Fundamentals of Real Estate Appraisal, Dearborn Real Estate.


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Self Assessment Answers

Chapter Ia1. c2. b3. a4. d5. d6. c7. b8. b9. c10.

Chapter IIc1. a2. a3. a4. c5. d6. a7. a8. a9. a10.

Chapter IIIb1. a2. d3. b4. c5. a6. d7. a8. a9. d10.

Chapter IVa1. a2. b3. a4. d5. a6. d7. a8. a9. d10.

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Chapter Va1. b2. d3. d4. a5. c6. d7. c8. a9. d10.

Chapter VIa1. d2. a3. b4. b5. d6. a7. b8. b9. b10.

Chapter VIIa1. a2. a3. c4. b5. c6. a7. c8. b9. c10.

Chapter VIIIa1. a2. b3. c4. a5. d6. d7. a8. d9. c10.

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