The Hindu Business Line : The two `w's and two `h's of retail

"Planning is the key to retail. `What' is determined by the customer profile, `how much' by the planned turnover, `how many' by the capacity available and `when' by commercial considerations and the product life-cycle."

MR MAZYAR KOTWAL, SENIOR MANAGER-ADVISORY SERVICES, KPMG MUMBAI

The Goliath in Indian retailing is the neighbourhood kiranawalla who constitutes the `unorganised' 97 per cent chunk. The tiny foothold of 3 per cent that currently belongs to organised retailing has been an enticing invitation, rather than deterrent, to big global players entering the organised space in droves with their stores. Reason: they anticipate organised retailing to grow in value from $6 billion last year to more than four times that much, by the end of the decade, even as a seven-fold jump happens in the physical area from 40 million square feet.

"Organised retailing in small-town India is growing at a staggering 50-60 per cent a year compared to 35-40 per cent in the large cities. With the growth of organised retailing estimated at 40 per cent CAGR (compound annual growth rate) over the next few years, Indian retailing is clearly at a tipping point. India is currently the ninth largest retail market in the world," says Mr Mazyar Kotwal, Senior Manager-Advisory Services, KPMG Mumbai. "Hundreds of new malls are launched every month; brand owners are approached on an average by 500-700 mall owners across the country to take up space in their malls. Approximately 1.6 million Indian households earn more than Rs 45 lakh per annum but spend only Rs 4 lakh per annum on luxury products... " Mr Kotwal answered a few questions from Business Line.

On the key challenges facing a retail company:

I can readily list at least ten that merit immediate attention. These are: Real-estate; planning and forecasting; procurement; supply chain and logistics; inventory management; shrinkage; investment in technology; taxation; customer loyalty; and availability of trained manpower. While the selection of the right retail space and putting in place the infrastructure (people, IT systems) are critical, viability boils down to operational efficiencies. Multiple retail outlets are going to fight for the consumer's share of wallet.

On factors that go into the selection of retail space:

The initial selection of the retail space is most critical — this will not only determine your revenues but also define your brand. If you own an upscale luxury brand, and your neighbour is a petty-shop, it will most likely affect your brand's image.

Some key aspects to consider before investing in retail space are: Key economic activity indicators such as presence of banks and educational institutes; health and infrastructure — number of hospitals, roads; showrooms of car companies, major residential colonies (this defines the catchment area); air, road and railway networks; retail activity in the neighbourhood; real-estate development potential; expected footfalls, conversions, and ticket size of each transaction; payback period — ROI, IRR; format — 1,200 square feet studios to 100,000 square feet large-format stores; product mix which we desire to retail; and ability to create shop-in-shop for example a coffee shop in an electronics store.

On planning and forecasting in retail:

Range planning is the process that ensures that the customer needs are met by buying the right width of the right product in the right depth and delivering it to the store at the right time. In simple terms, range planning is where you decide what to buy, how many options and how much of each option, and when to put it on sale. `What' is determined by the customer profile, `how much' by the planned turnover, `how many' by the capacity available and `when' by commercial considerations and the product life-cycle.

On competing with a neighbour selling the same or similar products:

The answer is price and product mix. Other than luxury products, price is critical. You have to offer the lowest possible price. And if you offer the lowest price without having the lowest cost model, you are not earning well for your self.

On key areas for efficiencies in the retail supply chain:

In the foods segment, approximately 40 per cent of the produce is wasted due to poor handling. This coupled with several intermediaries, who do not add any value to the product significantly raises the cost of the produce from the farm to retail shelf. The typical chain is: Farmer-auction-local mandi (commission of up to 14 per cent)-trader (commission of up to 12 per cent)-retailer (commission of 12-15 per cent)- consumer. In effect, the consumer has paid over 40 per cent extra for the produce without any value addition.

The chain is similar in FMCG and other consumer products: Manufacturer-C&FA-redistribution stockist-wholesaler-retailer-consumer. Again, the consumer is paying 30-40 per cent extra for the long supply chain. While this chain may not be avoidable for the small single outlet stores, the multi-store hypermarkets and supermarkets should definitely redesign the supply chain to eliminate excess costs. The Wal-Mart model is one example — where the producer supplies the product directly to Wal-Mart's warehouse/docking point from where the product is shipped to the Wal-Mart retail outlets. There is a single-touch-point for handling the products and all intermediaries are eliminated.

In apparel and footwear, companies have to contend with relentless pressure on price, costs, and lead times. They also face seasonal fluctuation, proliferation of design variations and product characteristics, multiple distribution channels and customer service requirements, and heavy reliance on outsource manufacturing.

On retail leveraging technology:

As a retailer it is important to have the right technology supporting not only your current business but also easily scale up to meet your fast paced growth plans. It is equally important to ensure that the technology is easy to manage; after all you want to be a retailer first and technologist later. It is critical that there is a centralised information system for the operations of the company.

Also, ensure that you have common systems and common platforms across all units. A good information technology set-up can help the company efficiently manage inventory, reduce working capital requirements and streamline the supply chain and logistics costs, thus reducing operating costs. It could then leverage its knowledge to exert pressure on its suppliers. Let us take the example of Wal-Mart:

Wal-Mart invested more heavily than its rivals did in technology to better manage its inventory and reduce operating expenses. It cut distributors out of the supply chain and tied inventory — via computer — directly to manufacturers to further bring down costs. As Wal-Mart grew large in the 1980s, it exerted leverage against its vendors in pricing, production, and delivery. It was not uncommon for Wal-Mart to tell Coca-Cola, a $13-billion company, to deliver on Sunday, or to suggest to a Procter & Gamble — at $30 billion in sales — that it should seriously consider locating its distribution centres adjacent to Wal-Mart's.

On ensuring customer loyalty:

Since it costs less to retain a customer than to attract a new customer, it pays to retain loyal customers by enhancing their shopping experience, making them feel special. Loyalty cards offering discounts, bonus points on purchases and special privileges such as home delivery, free/valet parking, first day preference for sales and new launches, exclusive cash counters etc are a preferred mode of identifying and retaining loyal customers. It is important that this is backed by strong infrastructure, such as customer help desks and IT support.

On manpower issues in organised retail:

Trained manpower is instrumental in the success of the store. Absence of good quality personnel supported by infrastructure and documented policies and procedures could result in malpractices and poor customer satisfaction. A company must invest in recruiting and training its people. It doesn't end here. The employees must be motivated and high on self-esteem. This comes from a good work environment, encouraging management and well-documented company ethos, policies and procedures.

A well-documented, easy to access and use model business processes manual goes a long way in helping employees carry out their tasks and not feel lost/confused about their roles and responsibilities. This also helps strengthen internal controls and efficiently service customers/resolve customer issues. Processes that should be documented for store operations include: cashiering, inventory management, customer service and query resolution, store opening and closing. Other processes which need to be documented for the company include revenue management (merchandise and display), buying and merchandising, finance and accounts, capital expenditure, HR & payroll, taxation and IT.

MuraliDe@gmail.com