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Sales &Distribution
Management
A study on the Sales &
Distribution of Mens Apparel
Guru Govind Mishra B10019
Murali P. Pathak B10029
Piyush Pathneja B10035
Vibhu Mangla B10059
BM-A (2010-12)
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CONTENTS
Indian Retail Industry- An Introduction .............................................................................................2
Classification of the Indian Retail Industry ........................................................................................3
Indian Apparel Market ................................................................................................................................5
Analysis of the Jamshedpur Market ......................................................................................................7
Three formats Under Study ......................................................................................................................9
Retail Profiling for Levis Jeans ............................................................................................................ 13
Bargaining Power of Retailers .............................................................................................................. 21
Cost of Stock Out ......................................................................................................................................... 22
Marketing Implications for the Different Formats ...................................................................... 26
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INDIAN RETAIL INDUSTRY- AN INTRODUCTION
The retail industry in India is currently growing at a great pace and is expected to go up to US$ 833
billion by the year 2013. It is further expected to reach US$ 1.3 trillion by the year 2018 at a CAGR of
10%. As the country has got a high growth rates, the consumer spending has also gone up and is also
expected to go up further in the future. In the last four year, the consumer spending in India climbed
up to 75%. As a result, the India retail industry is expected to grow further in the future days. By the
year 2013, the organized sector is also expected to grow at a CAGR of 40% According to the 8th
Annual Global Retail Development Index (GRDI) of AT Kearney, India retail industry is the most
promising emerging market for investment. In 2007, the retail trade in India had a share of 8-10% in
the GDP (Gross Domestic Product) of the country. In 2009, it rose to 12%. It is also expected to reach
22% by 2011. By 2017, the organized sector will be 20% of the total market share. It can be
mentioned here that, the share of organized sector in 2007 was 7.5% of the total retail market.
Today, the retail sector in India is worth $410 billion and accounts for about 10% of Ind ias GDP and
8 % of its employment. Organized retail in India is still in its
nascent stages, accounting for only 5% of the market share,
much lower than those seen in other countries as shown in
the box alongside. It is one of the toughest sectors to operate
in owing to low margins and intense competition. What
makes this category such an exciting future prospect is that it
is projected to expand to 2.5 times its present size (AT
Kearney Global Retail Index) over the next three years, to
achieve a market share amounting to over 50 billion dollars.
This projection is supported by the fact that the share of organized retail in the Chinese retail sector
has grown over 7 times in the last fifteen years.
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Retail
Food RetailClothes &Apparel
CLASSIFICATION OF THE INDIAN RETAIL INDUSTRY
The traditional classification is as follows:
1. FOOD RETAILSupermarkets: They are grocery stores larger in size than the
neighbourhood kirana shop and with greater variety on offer,
supermarkets can cater to customers who want a good
shopping experience on a regular basis without compromising
on affordability. Food bazaar is an example of this format.
Hypermarkets: They are super-sized stores that combine
supermarkets and department stores and carry a vast range of
products. Hyper markets fulfill consumers weekly shopping
requirements in just one trip. A popular example is the Future
Group's Big Bazaar chain.
Cash-and-Carry: Wholesale warehouses that cater mostly to
the needs of nearby retail outlets, these stores are oftenfrequented by individual consumers as well. Bharti-Walmart
has begun its Cash and-Carry operations in Punjab.
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Retail
ConsumerDurables
Electronics &Appliances
JewleryBooks &
Music
2. CLOTHING & APPARELNational Chain Stores (NCS): These are department stores
that carry products of a multitude of brands besides their
inhouse labels. Brands staff and operate shop-in-shops in
the retail spaces within an NCS. Shoppers Stop is a
prominent NCS
Multi-Brand Outlets (MBO): An MBO acts as a franchisee
for several brands which belong to the same retail segment,
such as sportswear or jewelry. An example of this format is
Planet Sports.
Single-Brand Stores: These stores are run by brands
themselves or their franchisees. They usually carry a richer
selection of the brands products as compared to an NCS or
an MBO. Nike has several single-brand outlets in India.
Malls: Umbrella shopping centers that lease space to NCS,
MBOs and single- brand outlets, malls enrich the shopping
experience by providing other facilities such as food courts,
fine dining and entertainment arcades.
Another method of classification based on product related verticals is as follows.
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INDIAN APPAREL MARKET
The estimates of 2009 show that the Indian apparel market is worth INR 1,542.5 bn, as against the
revised figure of INR 1,359.3 bn for 2008. In volume terms, 692.5 bn units were sold in 2009 as
against last years 627.9 bn units. The overall value growth in 2009 over 2008 was 13.5 percent,
while volumes grew at 17.2 percent. Based on the existing trend, it is projected that the Indian
apparel market will grow to INR 2,401.7 bn by 2014 at a CAGR 9.3 percent, provided the overall
economic scenario remains more or less stabilised at existing levels.
Volumes in the Indian apparel market over the six-year period of 2002-09 have gone up steadily
from 4,422 mn units in 2002 to 6,925 mn units in 2009. Value growth has been more pronounced. In
value terms, the Indian apparel market has grown from INR 613.0 bn in 2002 to INR 1,542.5 bn in
2009.
Of the INR 1,542.5 bn apparel market, the menswear segment continues to take up the lions share
at INR 556.4 bn (36.1 Hard Currency percent) even though this figure is a decline from 36.6 percent
market share in 2008. Womenswear accounts for 32.2 percent market share (INR 497.1 bn)
followed by 24.8 percent market share for the kidswear and uniforms segments (INR 382.0 bn) and
6.9 percent market share of unisex apparel (INR 107.1 bn). When compared to last year, all
segments - menswear, womenswear, kidswear and uniforms - have grown their market share.
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ANALYSIS OF THE JAMSHEDPUR MARKET
BENEFITS OF CATERING TO TIER 2 CITIES
Unlike metros, consumers in small towns are less concerned about the global upheaval . With the 6th
pay commission being implemented in the government sector, the disposable income in the hands of
the residents of these cities has increased substantially. Tier-II cities have some additional
advantages like prime space and lower rents which make them attractive.
DEMOGRAPHICS
Jamshedpur is one of the most important industrial areas in India. In fact, Jamshedpur is known as
the 'Pittsburgh of India'. Therefore, the urban population of the city is higher than the rural
population. It is estimated that about 47.31% of the population resides in the rural areas; whereas
the urban areas consists of 52.69% of the population of Jamshedpur.
The urban population is very much into shopping because very less other means of spending their
money in this city so appending on apparels and food is more than other tier -2 city average.
JAMSHEDPUR MARKET
Shopping in Jamshedpur is one of the most pleasurable and exciting experiences among shopping
freaks because of the availability of very less entertainment options. There is a vast array of
shopping markets in Jamshedpur. The three major shopping spots in Jamshedpur are the Bistupur,
Sakchi and the Jugsalai markets.
The branded apparels are mainly present as exclusive showrooms in Jamshedpur i.e. if one wants to
go shopping the branded way then the Bistupur market is a must visit since it has the stores and
factory outlets of almost all the leading brands of the world like REEBOK, ADIDAS, JOHN PLAYERS,
UNITED COLORS OF BENETTON, NIKE, FILA, ALLEN SOLLY, PETER ENGLAND, CATMOSS, GINI
& JONY.
The culture of Multi Brand Outlets is not very much prevalent in Jamshedpur but one outlet of this
nature is The Shoppers Square Mini Mall. This was the first of its kind to be built in Jamshedpur and
is responsible for introducing the mall culture to the Jamshedpurians. This mall houses some of the
leading brands of the world like LEVIS, SPYKAR, KILLER, D-DAMAS etc. It also attracts a large
number of youngsters because of its beautifully designed interiors.
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Apart from there is huge market for unorganized / unbranded apparels in Jamshedpur. Multi
storied stores like BAZAAR KOLKATA, CITI STYLE, CITI BAZAAR etc which have all types of
clothes, furnishings and accessories at affordable prices. The market also houses some of the brands
such as CHARLIE OUTLAW, LIVERPOOL etc.
Another place for shopping in Jamshedpur is the Jugsalai market which is also known as the BURRA
BAZAAR of Jamshedpur. Although Jugsalai is a very old, unplanned and congested place to shop yet
its the best locale in the steel city to purchase everything at amazing wholesale rates.
JAMSHEDPUR APPAREL MARKET
Jamshedpur is a typical tier 2 city and is getting attraction of brands in last few years only.
Consumer Demand is estimated to have dropped by 20-30% during last quarter in metros for
apparels despite the use of sales and huge discounts. Roughly, organized retail brands and
unbranded apparel have proportional market share of almost 50:50 in metros while this ratio varies
from 80:20 to 90:10 in smaller markets. Branded majors are now hoping to cash in on this potential
of Tier 2 cities at a time when consumption has dipped in metros .
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THREE FORMATS UNDER STUDY
We visited three different formats which sell Mens apparels. All the three formats have different
characteristics in terms of selling strategy and the distribution network that they possess for OTC
selling. The three formats were Modern Retail Outlet, Single-brand and Multi-brand outlet, which
will be discussed one by one going forward.
MODERN RETAIL OUTLET
These types of store are majorly part of hypermarkets like Big Bazaar, etc. We visited Big Bazaar
outlet here in Jamshedpur and one section of it had apparel section. Normally it is kept at a separate
corner of the store due to the fact that it is a medium-high involvement product for the customer
and hence he or she will search for the location by himself / herself. Also, such outlets store multiple
brands like Levis, Lee and few local brands too, due to the mix bag of target customers reaching the
outlets.
For Levis products, store places the order for apparels in high demand on three monthly basis. They
dont offer much width or depth of same brand, but do offer variety in terms of choice of brands. The
order is placed to the Big Bazaar Kolkata office and that is re-directed to the respective
distributor/company and the ordered material is received within 15-20 days.
In Mens apparel section, they have 3-4 product lines and 5-6 varieties present on an average for
each product line. They normally keep the sizes varying from S to XXL and keep an inventory ofaround 3-4 units /size. That makes the inventory of only mens section to be more than 1000+ units
at a given time for a given brand.
Average footfall per day for the store is estimated to be 200-300 customers/day. Out of that total
number of customers, around 50-60 visit the apparel section on daily basis. Average bill value per
customer visiting the shop is estimated to be Rs.1000-1500.
The salesmen are not assigned corresponding to a particular brand due to the presence of too many
brands in the outlet. Normally customers roam around by themselves in the store and look for their
choices which are followed by help given by salesmen in getting the desired colour or sizes as per
demand. The service in the outlet is not comparable to the one that someone gets in single brand
outlet models. As the basic proposition of store is based on discounting and hence not much focus is
given on providing customer service, etc.
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The targets are given on overall sales basis to store which is currently around 25-30 lakh per month
for Mango outlet. The margin given by distributor on the sale of clothing varies from 25-30% which
is relatively lesser than what is offered to single brand outlets i.e. company showrooms. The store is
having its primary catchment area around Mango and Sakshi. They dont sell any imported products
as done by other single-brand outlets of Levis.
Big Bazaar runs on discount store theme and hence seasonal sales and consumer discounts are
readily available in these stores. For Levis it works on profit-sharing model where the discount
offered to customers is carried by both the firms equally.
SINGLE-BRAND OUTLET (LEVIS)
This type of store are either company owned showrooms or the ones placed on franchise model.
The store visited in Jamshedpur got open in October and it works on 50-50 partnership model of
franchise and company. Major categories present in the shop were mens and womens apparelincluding formal and informal wears and winter clothes too.
The factory of Levis is situated in Bangalore from where all the orders are dispersed to various
distributor points. Patna region has one super distributor which supplies the clothes to most of the
eastern part of the country. The order is normally placed on six months advance basis based on
catalogue and demand is estimated for given designs and wears based on the local consumer
behaviour. This order is send to distributor and he subsequently places it to the head office in
Mumbai. In case of sudden increase in demand of particular clothing, order is emergently placed and
within a span of 15-20 days, the same is made available to the store from distributor.
In Mens apparel section, they have 6-7 product lines and 8-9 varieties present on an average for
each product line. They normally keep the sizes varying from S to XXL and keep an inventory of
around 5-6 units /size. That makes the inventory of only mens section to be more than 3000+ units
at a given time.
Average footfall per day for the store in Bistupur is estimated to be 25-30 customers/day. Averagebill value per customer visiting the shop is estimated to be Rs.1500-2200. The reason of such high
bill value per customer is the high-end products present in the shop which are mainly targeted
towards middle and upper segment of the society.
The salesman and saleswomen are known as FCs i.e. Fashion Consultant. They are well trained to
perform up-selling and cross-selling and interact with the customer to engage them efficiently. This
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single outlet model is more of a speciality store where broad assortment of apparel is kept and the
depth is found to be average. This concept is different from the other stores ofLevis which work on
multi-brand outlet model as later contains comparatively lesser width in the varieties offered.
The targets are given on overall sales basis to store which is currently around 15 lakh per month for
Bistupur outlet. The margin given by distributor on the sale of clothing varies from 35-57% which
clearly suggests that they cant rely much on volumes and is much higher than what is offered for a
normal FMCG product i.e. in the range of 8-10% on average basis. The store is having its primary
catchment area around Bistupur, C.H.Area and Sakshi. They even sell some imported products on
demand from the customer and this delivery is done through a different channel direct from
company bypassing the distributor intermediary.
They run discount sales twice in a year and proper advertising is done through newspapers and
billboards on prime location to attract more and more customers. There are total of 7 employees in
the store including manager and fashion consultant. Their payroll is based on fixed component and
variable one which majorly comprises of group sales targets and smileys achieved on individual
basis.
MULTI-BRAND OUTLET (CITY STYLE)
These kinds of stores are majorly popular in smaller cities like Varanasi, Allahabad, Jamshedpur, etc.
They are majorly focussed on Lower and lower middle segment and keep and assortment mix of
different brands falling in the price range of Rs.100-500. Major categories present in the store were
mens apparels, womens apparel, household apparel, cosmetics, etc. Mens apparel majorly included
shirt, jeans, trousers, jackets, sweaters, socks, undergarments and accessories. All these varieties are
present majorly of local bands and thats the reason of such low pricing strategy in this store. The
store is running in Bistupur from last 7-8 years. It is more like a discount store which gives seasonal
discounts regularly to its customers.
This model works on branch basis, i.e. the headquarter of City Style is present in Kolkata and it has 7
branches in Jamshedpur, Varanasi, Allahabad, Dhanbad, etc. The order is given based on the
consumer demand estimation for each brand, each style, each size, color and other criteria. Once the
order is placed from branches, it reaches Kolkata which is diverted to the respective manufacturing
companies for procurement purpose. This whole process of order and receiving the package takes
around 15-20 days and usually orders are placed on monthly or bi-monthly basis barring
emergency situations.
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In Mens apparel section, they keep 11-12 product lines and around 70-80 brands corresponding to
each item like shirt, jeans, etc. The store layout is freestyle and hence is looks very cluttered due to
discount format of the store proposition. Average footfall per day for the store is around 200-300
customers. Average sales per day come out to be 40,000-50,000 and they clearly play on volume
here due to low prices.
There are total of 38 employees including 36 salesman and 2 managers. The basic strategy for
selling is push-based and no specific demand from customers is really entertained. The overall
targets are given to store on three month basis based on sales achieved. No specific brand based
targets are set for the stores. The employees in the store work on fixed salary and no particular
margin is set for the retail format as it is company owned outlet only.
They run discount sales thrice a year and proper advertising is done through newspapers and
billboards on prime location to attract more and more customers. They believe in bulk selling of the
merchandise and know that customers will come from the segment that they are targeting because
of the variety of brands made available to them.
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ManufacturingHub
(Bangalore)
RegionalWarehouse
C&F Agent
ExclusiveCompany
Owned Outlet
Multi BrandOutlets
Modern TradeOutlets
ExclusiveFranchisee
Stores
RETAIL PROFILING FOR LEVIS JEANS
Levis sells its denim trousers and jeans for both men and women through various formats. In depth
interviews with retailers were conducted to ascertain the channel structure as designed by Levis
for the sale of its products. Through these interviews, the channel design for Levis was arrived at
which is approximately as shown below:
The manufacturing centre for Levis in India is in Bangalore. They are then transported to regional
warehouses. It has 4 regional warehouses in the country:
Bangalore Southern Region Patna Eastern Region Gurgaon- Northern Region Pune- Western Region
From these warehouses, the goods are transported to the C&F agents in the respective states. The
various types of outlets then take over the goods from the C&F agent. For the purpose of this study,
we shall look in to the profiling of 3 kinds of outlets, viz.:
Exclusive Company Owned Outlets Multi Brand Outlets Modern Trade Outlets
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Before we delve into the profiling of the stores, we need to develop an understanding of the
consumer behavior process for the problem of purchase of a pair of jeans and understand the cost of
stock out and bargaining power for each of the store types. This would help us develop a complete
retail profile. In pursuance of this, we shall be using the framework as elucidated below:
BRAND V/S STORE DECISION & TIME-PLACE UTILITIES
The decision making process in the case of purchasing in a pair of jeans is that of a limited decision
making category. Some of the most important factors that go into the purchase of a pair of jeans are:
Size Colour Fit Brand
Consumers who look for utilitarian benefit out of the product generally place comfort of fit as the
most important decision making criterion. Such consumers who seek prestige benefit out of the
product tend to place the brand as the paramount decision making parameter, with the other
factors being secondary to the brand parameter.
Since Levis tends to sell its jeans in the near premium category, it targets such consumers for whom
brand is the most important decision making parameter. Hence, understanding the brand decision
process of this category is fairly important to the marketing of this product. With respect to the
consumers of this brand, the marketing has been successful in moving the decision process from
Brand vs.
Store Decision
Service tobe provided
by company
Bargaining
Power of
outlet
Cost ofStock-out
Service
provided by
competitor
Time Utility
Place Utility
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low uncertainty of untried brands to high uncertainty of untried brands. Since the brand plays on
the theme of finding an identity for oneself and seeking prestige in the society, it makes it
imperative that the consumers who are loyal to the brand wait for it, in case it is not available.
The exclusive outlets satisfy the needs of such consumers who seek an extensive range of products
of the Levis brand. They have most of the SKUs that have a strong demand. However, those which
have very less demand or are considered super-premium are stocked exclusively by these stores.
Also, since consumers are generally willing to wait for such a product, the inventory is generally
maintained at low levels.
The multi brand outlets satisfy the needs of variety seeking and value seeking consumers who are
brand aware, prefer purchasing branded jeans, but would like to compare a few brands to find out
which one provides the best value for their money, before making a purchase decision. These
consumers usually visit these stores because they make planned purchase in this case. In suchstores, the SKUs which are quick selling are mostly stocked. Those which are super-premium are
rarely stocked in such outlets. In this case, the store loyalty is generally higher than the brand
loyalty.
The modern retail outlets satisfy the needs of those consumers who view shopping as a leisurely
activity and generally do not make a planned purchase for jeans at such stores. They display picking
behavior and make a purchase decision, only if they find that all the decision parameters are fully
satisfied. In such stores, the SKUs which are generally fast moving and belong to the latest trends in
fashion are stocked.
The choice of the store for purchase of a pair of Levis jeans depends on the following parameters :
Intent of shopping Location Reputation of the store Service level offered Sales promotion offered by the store
Since this is a product which entails a limited decision making the store decision normally
dominates. A person would go to the nearest store first, if he wishes to compare various brands and
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choose the best among them. The consumer would prefer to visit an exclusive store because of the
following reasons:
He is not sure of the colour, stitch etc. However, he wants to purchase a Levis jeansirrespective of the other factors. The exclusive store gives him the confidence that the
products would be originally branded and not belong to some spurious manufacturers
which might be the case in some multi brand outlets
He wants to see a broad range of jeans and then decide what is best suits him
The following table sums up the place and time utilities for the decision processes that are involved
in the purchase of a pair of Levis jeans:
Decision Process
Uncertainty of
untried brands Place Utility Time Utility
Variety Seeking LowNearest multi-brand
outlet
Immediate
purchase neede
Cannot wait for the
product. If at all
waiting is required,
it would be for a
very limited amount
of time
Limited Problem Solving High
Willing to travel to
another outlet or an
exclusive showroom
for the product
desired
Can wait for the
product desired for
an extended amount
of time
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SERVICE LEVELS OFFERED
The service levels offered in each of the formats is different. The involvement of the sales person in
the consumers decision making process varies across the formats. The following table discusses the
involvement of the salespersons across formats with reasons given for classifying it so:
FormatInvolvement of the
salesperson required
during the decision process
Reason
Exclusive Store High
The salespersons in these exclusive stores
are called fashion consultants. They
generally assist the consumer by giving
tips to them throughout the process of
trying out different product and help
them choose the colour, size etc. which
fits them right
Multi brand outletHigh if very few brands are
stocked. Low if many brands
are stocked
The salespersons in stores with few
brands behave like salespersons of the
exclusive stores. However, if there are
many brands stocked, they handle an
individual counter and do not offer the
consumer help through the entire
process
Modern Retail
OutletLow
The salespersons in modern retail outlets
do not exclusively look after the apparels
segment. Hence they do not involve
themselves in the consumers decision
making process
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Having established the service levels at each of the retail formats for Levis jeans, we can now turn
to identifying the selling style by the retailers for each of them.
Format Consumer Decision Making Selling Style
Exclusive Store Limited Problem Solving
The salespersons should adopt the new
business selling strategy. I (Salesman)
am OK and you (Consumer) are OK
should be the approach taken by such
salesmen. Analytical thinking is
necessary to understand the consumers
requirement and sell them the desired
product
Multi brand outlet Variety seeking
If the store stocks very few brands, then
the salesmen should adopt the new
business selling strategy as mentionedin the box above. However, if the store
stocks many brands, the salesman
should adopt a trade selling strategy. I
(Salesman) am not OK and you
(Consumer) are OK should be the
approach taken by such salesmen
Modern Retail
OutletVariety Seeking
Since the store such as these generally
stock many brands, the salesmen should
adopt the trade selling strategy. I(Salesman) am not OK and you
(Consumer) are OK should be the
approach taken by such salesmen
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SERVICE ORIENTATION
In each of the formats mentioned above, a different kind of service orientation needs to be taken
adhered to. It should take into account the sellers willingness to engage in selling as well as building
a relationship with the consumer.
In an exclusive store, the fashion consultants should provide service towards increasing the value
proposition of the product being sold. This generally entails good service at the point of purchase
and would include:
Providing a conducive environment in line with the consumers need, like providing acomfortable shopping ambience in the store by installing adequate lighting, air
conditioners etc.
Helping the consumer identify his needs and choose a product best suited for him Pampering the consumer during the purchase process to help him have a memorable
shopping experience
In a multi-brand retail outlet, it has been established that the salesmen generally have a low
involvement in the decision making process of the consumer. Hence the service orientation should
be towards reducing the post purchase dissonance. This could be done in the following manners:
Provide post-sale service. This could include handling the customer complaints withregards to the size, colour, fit etc. Any faulty products should be immediately replaced.Prompt service helps maintain a strong relationship with the consumer and spread a
positive word of mouth
Provide services like alteration of the purchased jeans in case the consumer is concernedabout the fit of the product
The purchase of jeans which happens in a modern retail store, is similar to that of a multi brand
retail outlet. Hence the salesmen in such stores should display a similar service orientation as that
shown in the multi brand retail outlets
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RETAIL PROFILE SUMMARY
The following table summarises the retail profile of each of the 3 formats that have been taken up as
a part of this study:
Factor
Exclusive Company
Owned Outlet
Multi Brand Retail
Outlet Modern Retail Outlet
Customer buying
situation
Satisfies the need of a
customer who wants to
select the product from
a wide range offered by
the brand. Depth of
assortment is critical.
Satisfies the need of a
customer who wishes
to select the brand
after comparing with
various brands.
Product intensity
should be high.
Satisfies the need of
a customer who
views shopping as a
leisurely activity and
purchases
product only if all the
decision parameters
are fully satisfied.
Type of localityLocated in a posh, high
end commercial area
Located in a central
commercial business
area
Located on the
outskirts of the city
Factors influencing
choice of brand
Availability of the
desired product
Price, colour, size and
other product related
factors
Promotional activity,
differentiation of the
brand from others,
ambience
Customer
PatronageVery loyal to the brand
Brand aware, but not
very loyal to the brandNot very brand loyal
Details of Stocks
A wide range of
products is maintained,
including both slow
and fast moving
products
Only fast moving
products are stocked
High fashion
products relevant to
the latest trends are
stocked along with
fast moving products
Service Levels
RequiredHigh on service
High on service if very
few brands arestocked. Low in service
is many brands are
stocked
Low to average on
service
Profitability of
retailer from the
product category
High marginsRelatively lesser
marginsHigh margins
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BARGAINING POWER OF RETAILERS
All the three formats mentioned above realize different levels of bargaining power with company.
The reason being the different nature of business they are into and the number of alternative
options each of the format has to counter the companys enforced decisions. Major conflict that can
happen between company and the retailer is on margins, shelf-space, tagging by company i.e.
pushing low demand products with high demand products and other factors. In such cases, single
brand outlet faces a disadvantage as compared to other two retail formats due to lack of choices that
are given to them. Though the tradeoffs is made by getting relatively higher margins from company,
but that sometimes act as additional advantage for company too for putting up pressure on the
outlet for keeping few stocks.
At the same time, for other two formats, the bargaining power of retailer is much higher due to the
options that are present with them. Company cant put pressure on such outlets beyond certain
limits, because in that case it will be more of companys loss than stores loss. And this is the reason
that the margins are relatively lower for such outlets than single brand one and company prefers to
stock only those items that are in demand to avoid any losses.
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Mens Apparel Page 22
COST OF STOCK OUT
Cost of stock out is defined as the cumulative loss to the company/brand caused by loss of sales,
profit and good-will due to non-availability of material when the consumers wanted it. Cost of stock
out is directly related to the bargaining power of the outlet and with the higher cost of stock out at
an outlet, the bargaining power of the outlet also increases correspondingly. Thus the extent of the
service being provided at a retail outlet will depend upon the cost of stock out.
In todays retailing environment of increasing competition the companies are adopting cost cutting
strategies and one of the most common strategy adopted is that of maintain extremely lean
inventories but these reduced inventory levels become too lean if the sales are lost because of
these.
One of the formulas that can be used for calculating a cost of stock out is as follows:
CS = (NDOS * AUSPD * PPU) + CC1
Where,
CS = Cost of a Stock out
NDOS = Number of days out of stock
AUSPD = Average units sold per day
PPU = Price per unit or profit per unit
CC = Cost of consequences
Here, consequences includes costs associated with a production line that has been idled or must be
switched over to accommodate another process due to the stock out
One of the other methods of determining consumer reaction to retail stock out situation and how
varying responses can be translated into an economic cost to the retailer is the use of Basic stockout model as proposed in Stockout Cost Models Empirical Tests in a Retail Situation by C. K. Walter
AND John R. Grabner
1 Source:http://www.nextlevelpurchasing.com/articles/stockout-cost.html
http://www.nextlevelpurchasing.com/articles/stockout-cost.htmlhttp://www.nextlevelpurchasing.com/articles/stockout-cost.htmlhttp://www.nextlevelpurchasing.com/articles/stockout-cost.htmlhttp://www.nextlevelpurchasing.com/articles/stockout-cost.html -
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BASIC STOCK OUT MODEL
This model explains how a customer reacts in a situation when faced with a stock out.
When a customer enters a store with an intention to purchase a product which is governed by
product type, price, brand, size, and quantity, the consumer can face to situations either the productis in stock or not. If the product is in stock the consumer will purchase the item in the process
furnishing revenue to the store and satisfying his own requirement. However, if the desired item is
not in stock, the customer must decide on an alternative to his desired purchase. Here consumer
can look for a substitute for the product or brands in various price ranges, substitute another size
of his first choice brand, delay his purchase until a new shipment is received by the store, or
take his business to another source of supply. All these choices made by consumer have an
economic consequence for the retail store which can be measured in terms of the revenue
difference, RD, between the intended purchase and the actual purchase.
RD = PA PO
Where, PO = Price of Out-of-stock item
PA = Price of item actually purchased
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Revenue difference can be positive, zero or negative depending upon the choice made by the
consumer. In the worst case scenario if the consumer decides to leave the store without making a
purchased RD = - PO.
Two modifications to the basic revenue difference equation expand it to the general situation. First,
an amount equal to the value of the lost consumption during the waiting time until the customer
makes a return trip is subtracted. The simplifying assumptions are made that the customer had
exhausted his home supply of the product and demand cannot be accumulated. New parameters
are:
AU = Annual number of Units of the item purchased under in-stock conditions
WT = Waiting Time as a fraction of a year
Second, quantities other than single units are permitted by using these multipliers:
UA = Units Actually purchased
UO = Units desired but Out of stock
The general case revenue difference equation is then written:
RD = [(UA * PA) - (UO * PO) - (AU * WT * PA)]
Thus the cost of stock out or the revenue difference will be governed by other factors like the type of
product with lower chances of a loss of sales in low involvement product with the customer might
pick up a substitute in case a product is not available whereas in case of a high involvement product
the revenue difference might be high with consumer preferring a bran and is not ready to buy a
substitute. Also in turn it will be governed by the factors like brand loyalty, willingness of customer
to wait for the product and chances the customer will return again to purchase the product in case
of a stock out. In our study we have made use of the basic stock out model for calculating the cost of
stock out for the three formats of the retail outlets selling the men apparels. The assumption made
in our study is that in case the consumer doesnt find the product that he is looking for he will leave
the store without making the purchase, as no data was available on the alternate purchases made by
the consumer in case he doesnt find the item that he is looking for. Hence for calculating the cost of
stock out the above formula gets reduced to
RD = - PO
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COST OF STOCK OUT FOR THE THREE FORMATS CHOSEN
ParameterExclusive Store
(Levis)
Multi Brand
Outlet
Modern Retail
Outlet
Average monthly footfall 1050 6000
25000 (For
Apparels
approx. 2500)
Average Bill Value 2000 1000 1200
Customer Lost due to stock out in a month 30 200 150
Average Sales in a month 1500000 1200000 3000000
Cost of stock out in a month 60000 200000 180000
Percentage of Sales 4 16.67 6
Yearly Cost of Stock out 720000 2400000 2160000
Thus the calculations reflect that the cost of stock out in a Multi brand outlet is much higher as
compared to an exclusive store. This might be because of the reason that a loss of sale due to a stock
out in a multiband outlet also hampers the chances of up- selling
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MARKETING IMPLICATIONS FOR THE DIFFERENT FORMATS
Now that the profiling for each of the formats is done and the cost of stock-out derived, we look into
the marketing implications that these formats have. The following table gives details about the said
implications:
FactorExclusive Company
Owned Outlet
Multi Brand Retail
Outlet
Modern Retail
Outlet
Cost of stock out
for the company
Cost of stock out is
relatively low (approx.
4% of the monthly sales)
Cost of stock out is
relatively high
(approx. 17% of the
monthly sales)
Cost of stock out is
relatively high
(approx. 6% of the
monthly sales)
Display Space Space available is high
High is very few
brands are stocked.
Low if many brands
are stocked
High
Bargaining power
of the companyHigh Limited Very Low
Inventory to be
maintained
A full range of products
needs to be maintained
Fast moving products
need to be amply
stocked. Slow moving
ones can be given a
miss
Fast moving and
high fashion
products need to be
amply stocked
Suited for
push/pull /display
/information etc.
Pull/display/information
Pull/display if very
few brands are
stocked. Push if many
brands are stocked
Pull/display
The information given in the above table could be used by managers to gain a better understanding
of the dynamics of the retailing industry with a specific focus on mens apparel. The insights
developed through this could help an organization understand the powers at play in the market and
help them manage them better.
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