research report on customer centric assortment planning - india vs. rest

8/14/2019 Research Report on Customer Centric Assortment Planning - India vs. Rest

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Enabling Sustained Business Excellence

Released on: February 25th 2009Retail Industry VerticalKINDUZ Business Consulting Pvt. Ltd.

India Office: [email protected]://www.kinduz.com/

Released by: Aartee RoyIndia Mobile: +91-9790915023Email:[email protected] full report athttp://kinduz.ning.com/group/retail
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Customer Centric Assortment Planning India vs. Rest

A KINDUZ Research Initiative

Page 2 of 14Version 1.0Release Date: February 25th 09

uncontrolled ifcopied or printed

2009 KINDUZ Business Consultinghttp://www.kinduz.com/

Confidential, All Rights Reserved

About This report

Indian Retail Industry is the largest employer after Agriculture (around 8% ofthe Indian population) and it has the highest outlet density in the world

however the organized retail industry is still in a very nascent stage. The

market is mostly unorganized and it is dominated by fragmented Kirana

stores (mom-and-pop stores) further weakened, by poor supply chain and

backward integration. Desired skill sets (for e.g. logistics, demand planning,

merchandizing, etc.) are not easily available due to the low maturity of the

industry.

Retailers attraction for India is understandable but there are various reasons

why the organized sector is still a negligible component of the complete retail

industry in India. Regional tastes in the Indian context take on a completely

new dimension the purchasing parity, language, food, religion, and festivals

acquire a distinctly local element, within a few 100 kilometers. Understanding

these and tailoring the product offering, while maintaining the operational

profitability is a key skill that retailers will need to build to survive in this very

dynamic market.

For most retailers a significant paradigm shift is necessary to realize true

customer-centric assortment, one which will initiate a fresh vision of how they

can consistently meet and ideally exceed consumer expectations. The key

would be to strategically decide on which levels (e.g. product level, store

level, etc.) differentiation is needed, while limiting the complexity and cost of

differentiating the assortment to local needs.

KINDUZ research shows that retailers need a system where the assortment

planning starts and ends with the customer. A system where the analysis of

customer trends and behavior, catchment analysis & competitor analysis are

all key to the assortment plan. A system where subsequently the actual

assortment is planned on a more granular level, for example by item and by

store cluster, which achieves previously set targets and supports the

assortment architecture from the category plans.

Internationally, retail giants like Walmart have initiated the incorporation of

localized elements into their product offering to capture the lost opportunity at

a regional level. Walmart has upgraded and tailored its merchandise mix infive key categories that appeal to occasional Wal-Mart shoppers: consumer

electronics, pharmaceuticals, home goods, apparel and fresh food.

KINDUZ initiated a global research on how retailers approach Customer

Centric Assortment Planning in India, and compare it with rest of the world.

Indian Retail

209 million households,

46 million consuming

classes

Modern Retail accounts

for 2-3% of the $350

billion Indian retail

industry.

Indian Food market is

estimated at $182 billion


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Table of Contents

Key Conclusions from the Research ........................................................... 4Research Area 1: Challenges for 2009 ....................................................... 6Research Area 2: Top Line Fulfillment at Store Level ................................. 7Research Area 3: Regional Disparity .......................................................... 8Research Area 4: Store Clustering for Mix Optimization ............................. 9Research Area 5: Capturing Lost Opportunities at Regional Level ............ 10Research Area 6: Securing Bottom lines in a Decentralized Environment 11Research Area 7: Most Popular Inventory Management Practices ........... 12Research Methodology ............................................................................. 13Respondent Profile ................................................................................... 13


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Key Conclusions from the Research

After aggregating our research results based on online surveys and face-to-face discussions with retailers

across the globe, certain key conclusions have emerged regarding current retail industry practices.

Conclusions that are directly related to the top line and bottom line

Key Conclusion 1: Retailers across the globe are struggling with shrinking top lines

The toll of the recession is visible in full swing and most retailers around the world are struggling to uplift

their receding top lines. Ambitious business plans had been set during the 2007- 08 economic boom and

had been supported by aggressive resource allocations. Retailers are now figuring out how best to

salvage what is left of their resources, going into a consolidation and cost cutting mode.

Key Conclusion 2: For a stores success, merchandise mix is the second most critical factor afterlocation

Good locations without a mix that captures the interest of the catchment, cannot sustain themselves for

long. If the location and mix are right for the target customer they would be pulled to the store and

reduces the need for push selling. Spending on aspects like right location, benchmarking against local

competitors can minimize the excess resource drain to market a concept.

Key Conclusion 3: Localized assortments can help boost sales volumes

While global retailers understand the importance of a localized mix, there are gaps in customer profiling

and catchment analytics to help customize the range to local requirements. In the Indian context whilemix and location are given equal importance, customer profiling does not feature at any priority level,

reinforcing the need for Indian retailers to research their target market segments before allocating serious

resources for unplanned expansions both geographically and categorically.

Key Conclusion 4: Store clustering and mix standardization form the basis of assortment planning

Since resource efficiency and economies of scale will be hit if each store was to have a different mix,

stores are normally clustered based on average sales for mix optimization. However average bill sizes

need to be also reviewed while taking the average sale into account.

Key Conclusion 5: Assortment plans need to be benchmarked against regional brands

A wide variety of Stock Keeping Units (SKUs) could theoretically provide the Average Sale and Bill Size

projected for a store however the regional brand mix already existing at a location should never be

overlooked. The regional brands, be it at a store or product level, have over their period of operation,

acquired insights and relationships with their customers which reflect in their brand positioning.


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Key Conclusion 6: Backward integration of store requirements is critical to prevent bottom line

depletion

If decentralized sourcing is considered to inject the local feel into the merchandise mix, it is advisable to

maintain a pull strategy through the system whereby localized orders are consolidated at the corporatelevel. This will help maintain predictable bottom lines and reduces the risk of brand dilution.

Key Conclusion 7: Inventory visibility across the chain is required to keep ageing under control.

In both decentralized and centralized environments, Stock On Hand visibility across the chain of

operation is critical, in order to improve Return on Investment (ROI) and prevent accumulation of ageing

inventory. This requires dedicated and integrated Information Technology (IT) and Supply Chain

Management (SCM) departments to take charge of the complete Supply Chain.


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Research Area 1: Challenges for 2009

The four most recent recessions began with falling sales and falling

EBITA (Earning Before Interest, Tax and Amortization) in the consumer

discretionary sector while some sectors like consumer staples and health

care have been fairly resistant to recessions. In almost every recession

which was studied, sectors contracted much more quickly than they

recovered. Typically, it takes six to eight quarters for a sectors EBITA to

bottom outfewer in 197375 and more in 198082. After the recession

of 2001, however, it took just over two years for most sectors to recover

their peak EBITA levels once they reached bottom.

As expected, unfulfilled sales targets emerged as the single biggest factor

impacting retailers across countries. Considering the state of the global

economy when the sales targets would have been set in beginning 2008

and the extent of recession at the time these responses were received,

much larger share of the international respondents claimed to have taken a

hit to their bottom lines as well, while inventories were not such a bigconcern. But on the Indian side piling inventories have emerged as a slightly

greater concern area than the margin reductions, indicating that demand

planning in India is an area needing more focused attention. Indian

perception seems to fare better with regards to the expected hit to top lines

and bottom lines, when compared with the rest of the world.

Key Conclusion 1:Retailers across the

globe are strugglingwith shrinking Top

Lines


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Research Area 2: Top Line Fulfillment at

Store Level

While the challenges at a macro level are clear, these need to be drilleddown to a store level to be able to arrive at possible solutions. Across the

globe, location and then the merchandise mix emerged as the two most

critical factors for the success of a store. Internationally store location is

the primary success factor for a store followed by the assortment

offering. However, in India both location and merchandise mix are

equally important reinstating, the diverse needs and preferences of

over a billion people.

It is important to reaffirm that location and mix cannot be successful in

isolation, they both need to be right. Location and store size will define

the brands positioning in the catchment, and further benchmarking the

regional brand mix will minimize the excess resource drain to market a

concept. The location and the mix need to be marketed with a clear

focus on the target customer to be able to spearhead the brand

acceptability. However, it is the customers experience on the floor and

their interaction with the sales staff which will encourage or discouragethem to visit again. Customer analytics which is the basis for identifying

the target customer and hence determining the estimated market size is

completely ignored in India as per the data available. Industry should

consider investing in research pertaining to customer demographics

before committing resources to aggressive plans.

Key Conclusion 2:Merchandise mix is the

most critical factor

after location, for thesuccess of a store


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Research Area 3: Regional Disparity

The fact that merchandise mix is critical has been established without a

doubt and similarly what is it within the merchandise mix that needs to be

addressed is also critical. Globally the lack of localization of the

assortment is claimed to be the reason for the disparity in regional sales,

emerging from an inadequate understanding of the customer profile at

these regions. Inconsistency in replenishment leading to stock outs of

key SKUs followed as the third leading factor.

In the Indian context, extent of inefficiencies in replenishment clearly

state the maturity of international retail compared to India. Indian retailers

need to invest resources to streamline their end to end supply chain

networks to not only avoid stock outs but also better manage their

inventory positions.

While lack of customization of merchandise mix to local needs emerges

as the second most critical factor for Indian retailers, the correlation to

customer profiling does not exist. Reinforcing, again the need for Indian

retailers to research their target market segments before allocating

serious resources for unplanned expansions both geographically and

across categories. Without even attempting to research the customer

and catchment, there is no way that the mix can be suited to these

segments.

Key Conclusion 3:Localized assortments

can help boost salesvolumes


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Research Area 4: Store Clustering for Mix

OptimizationJohn Fleming (Chief Merchandising Officer, Walmart)I worry most

about the in-store execution. Its one thing to say, Weve got six

segments. We understand the assortment. We understand the

occasions. We understand the experience. We understand the

competitive set. And its another thing to really make that work

operationally at the store level.

While a localized merchandise mix would definitely benefit both the top

line and the bottom line, achieving it, requires resources to be invested in

terms of catchment studies, customer profiling, benchmarking local

competitors etc. Since resource efficiency and economies of scale will be

hit if each store was to have a different mix, stores need to be clustered

based on some common parameters which will help standardize the mix

for that particular lot. Average sales are globally favored as the basis for

store clustering followed by geographical span. Clustering stores

geographically works well logistically, and helps combine similar regional

preferences. However, clusters based on average sales definitely need

to be viewed along with average ticket sizes to be able to arrive at the

correct pricing strategy for the target market segment. Ideally a mix of

geography and sales volumes should be considered, to arrive at the

most commercially viable basis for store clustering.

Key Conclusion 4:Store Clustering andMix Standardization

forms the basis forAssortment Planning


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Research Area 5: Capturing Lost

Opportunities at Regional Level

Store clustering will help standardize the assortment plan to a largeextent thus streamlining the use of resources and time. Retailers can

adopt various means to identify and incorporate the localized elements

which can then become a part of the standard mix for a cluster of stores.

Globally, benchmarking product mix to include regional brands is the

most favored method to bring in the local touch into an otherwise

standard assortment. However, benchmarking requires a deep

understanding of not only the local catchment but also the brand

positioning of the retailer itself, to be able to capture regional elements

which fit or can be upgraded into the bigger picture.

As a secondary alternative, retailers are tied whether to increase

marketing spends; invest in better tracking and capturing of lost sales

into centralized assortments or to completely decentralize the whole

buying operation to the regional level. Decentralization could be a valid

proposition where the IT infrastructure is strong enough to provide clear

visibility across all levels of operation covering all geographical locations.

However despite that, decentralization could risk bringing in too much

diversity in the mix whereby the brand identity is lost. While fashion might

not be able to risk this extent of diversification, decentralization can be

ideal for consumer staples.

Key Conclusion 5:Assortment Plans need

to benchmark mixagainst regional

brands


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Research Area 6: Securing Bottom lines in a

Decentralized Environment

Decentralization can also put the bottom lines at stake if the contractsare not being negotiated in a centralized way. Decentralization could be

considered an option where complete visibility of regional operations is

possible and checks and balances can be put in place.

To preserve economies of scale and control bottom line depletion,

supplier negotiations need to be controlled at the center while actual

buying based on agreed terms could be carried forward by the regional

teams. This is only possible if the regional teams are equipped to handle

demand planning and forecasting.

Internationally, both push and pull strategies are favoured equally as

long as the control stays at the corporate be it in terms of supplier

negotiations or backward consolidation of store orders respectively. This

would ensure better control on the buying patterns and efficient

implementation of changes in strategy.

Indian retailers do not favour backward integration of store requirements

and would rather consider allowing the region to operate as an

independent profit center, which might put their brand values at risk. How

they tackle this risk would be interesting to notice in the future.

Key Conclusion 6:Backward integration

of store requirementsto prevent bottom line

depletion


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Research Area 7: Most Popular Inventory

Management PracticesAs was evident in earlier graphs, inventory seemed to be a bigger

problem for India than for the rest of the world even when most retailers

are operating in a centralized environment. Likelihood of this concern

growing in a decentralized environment is greater. Hence it is important

to understand global preferred practices for ageing inventory

management.

Globally in-store discounting and ensuring inventory visibility across all

locations are the two most preferred options for liquidating ageing

inventory. These are not possible without immaculate IT and SCM

backbones that are integrated. Predefined stock cover targets at store

and warehouse levels would need to work in tandem with the inventory

visibility. Mass discounters are a good channel for liquidating excessinventory but at a further reduced margin; while discounting within your

store could generate additional sales and also salvage some minimum

margin. Retailers need to take a conscious call regarding the scale and

promotion of in store discounts, in tune with the brand image that they

want to communicate.

Key Conclusion 7:Inventory visibilityacross the chain is

required to keepageing under control


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Research Methodology

Target respondents across the globe were approachedthrough emails, blog posts, invitations on various retail forumsand through personal meetings, to complete the surveyquestionnaire. Post the initial contact three weeks time wasallowed to pass before the required sample size wascollected. Responses were then aggregated to provide anoverview. The respondents were further clustered into Indianand international participants and responses wereaggregated again. The analysis also takes into account thefeedback received during face to face meetings with twelveIndian retailers.

Respondent Profile

The survey received three hundred and twenty six responses

from all over the world, out which 69% were from India while

38% were from the rest of the world primarily USA, UK,

Ireland, Russia and Thailand. 72% of responses were

received from people functioning in managerial to leadership

levels with greater than 4 years of industry experience. In

terms of business formats hypermarkets took the lead with

32% respondents selecting that format as the basis for their

choices. Department stores and mass discounters featured in

the same proportion with 25% respondents selecting each of

these formats. 43% of the respondents claimed that their

business format was meeting existing requirements of

customers while 32% were involved in aspirational selling of

select brands.

Respondent profiles did not vary much between Indian and

international respondents, excluding that bias from the

survey.


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RETAIL INDUSTRY CONSULTING AT KINDUZ

The retail vertical at KINDUZ provides end-to-

end consulting and implementation solutions.

The retail team consists of experts from varied

retail domains covering the complete retail cycle

from sourcing, merchandising, supply chain

management to operations. The senior team

jointly holds over 40 years of retail experience

with established retailers like Future Group

(Pantaloon), Aditya Birla (Trinethra), Landmark

Group ( Lifestyle) and Odyssey.

Our endeavor is to maintain a constant track of

relevant trends in the global and Indian retail

industry through regular research initiatives.

Our retail services include:

1. Catchment Analytics

2. Customer Profiling

3. Competition Mapping & Benchmarking

4. Defining Brand USP

5. Assortment Planning

6. Format Feasibility Analysis

7. Multiple Channel Retailing

For Retail Consulting and Research servicescontact us at:

[email protected]

Contact Phone: +91- 9790915023

Join the RETAIL INSIGHTS Network at:

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ABOUT KINDUZ

KINDUZ Business Consulting enables

'Sustainable Business Excellence' for its clients,

through its services around Industry Researchand Insights, Business Process Management,

Human Development Management and

Business Excellence.

Founded in 2008 by senior industry experts from

global companies like Capgemini, Motorola,

Wipro, Oracle, Ford, ING, TATA Group, and

Lifestyle, KINDUZ currently provides consulting

services in India and Middle East.

Head Office Address:

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