SIBM PUNE

MRP Project: Retail Industry

Comparative Analysis of Pantaloon Retail v/s Shoppers Stop
Rishi Kumar, 33124 Subhash Onathara, 33132 Gaurav Patankar, 33222

2011

MRP PROJECT

Retail Industry Overview:

The Indian retail industry in valued at about $427 billion and is expected to grow to $500 billion in 2010 and $637 billion in 2015. Only three percent of Indian retail is organised. Retailers of multiple brands can operate through a franchise or a cash-and-carry wholesale model. Retail is Indias largest industry, accounting for over 10 percent of the countrys GDP and around eight percent of employment. Retail in India is at the crossroads. It has emerged as one of the most dynamic and fast paced industries with several players entering the market. That said, the heavy initial investments required make break even hard to achieve and many players have not tasted success to date. However, the future is promising; the market is growing, government policies are becoming more favourable and emerging technologies are facilitating operations. Retailing in India is gradually inching its way to becoming the next boom industry. The whole concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping. Modern retail has entered India as seen in sprawling shopping centres, multistoreyed malls and huge complexes offer shopping, entertainment and food all under one roof. The Indian retailing sector is at an inflexion point where the growth of organised retail and growth in the consumption by Indians is going to adopt a higher growth trajectory. The Indian population is witnessing a significant change in its demographics. A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing working-women population and emerging opportunities in the services sector are going to be the key growth drivers of the organised retail sector.

Organized Retail in India

Projected size of total retail in 2010 Projected size of organized retail in 2010 The estimated total retail market size in India in 2008 Total size of organized retail in 2008 0 21 100 200 300 400 500 51 353 416

US$ billion

Segment wise share in Organised Retail Home Dcor

Books, music and Gifts 3% Beauty Care 2% Footwear 8% and Furnishing 6% Jewellery and Watches 6%

Food and Beverage 18%

Consumer Durable 20%

Clothing and Textile 37%

Some Facts
As of 2011, India was the second most attractive emerging market destination for retail investment in a ranking by A.T. Kearny Global Retail Development Index * India held the top spot for 3 consecutive years but was overtaken by Vietnam in 2008 * In 2009, India regained the top spot * Consumer Spending in India has increased by 75% in last 4 years * * Expected to quadruple in the next 20 years * *

Sources: * AT Kearney Global Retail Development Index * * Confederation of Indian Industries Study on Consumer Spending

Key Players
Pantaloon Retail (India) Pantaloons managing director Kishore Biyani believes in changing the rules. When Pantaloon started the Big Bazaar discount stores in 2002, malls were not part of the shopping culture. Big Bazaar became a hit, as it combined the look and feel of Indian bazaars with aspects of modern retail like choice, convenience and quality. Headquartered in Mumbai, the Rs 3,500-crore company now operates over 5 million sq ft across 40 cities.

Shoppers Stop A menswear store owned by K Raheja in the Mumbai suburb of Andheri in 1991 has now transformed into Shoppers Stop, with 27 departmental stores. The company entered airport retailing in a joint venture with the Nuance Group. It also launched Indias largest hypermarket, Hypercity. In 2005, it bought the Crossword bookstore chain. Lifestyle Growing from one store in Bahrain in 1973, the NRI-led Landmark Group today operates over 5 million sq ft in the Middle East and India. The groups first Lifestyle store in India opened in Chennai in 1999. Now it has 325,000 sq ft in Chennai, Hyderabad, Bangalore, Gurgaon and Mumbai. Its first hypermarket, branded as Max, is expected to open soon.

Key Levers to optimise supply chain

Sales data for forecasting: The baseline data (of over 2 years) could show a downward trend (from the upward or static trend till around 18 months ago). Therefore, it would be ideal to change the parameters used for forecasting to give the data from recent months a higher weightage. Store inventory based on days of supply: The days of supply in the stores as well as in the warehouse would have increased. Retailers should aim to optimise their inventory numbers by modifying replenishment parameters and the replenishment cycle times. Flow through merchandise in distribution centres (DCs): An increase in the number of pallets and cases for store pre-packs leads to an increase in the percentage of material flow through the inventory in the DC. Logistics optimisation: While optimising the replenishment cycles and increased flow through, retailers would need to optimise their warehouse to store transportation to match it by analysing the number of trips per store and incomplete loads. Re-look at assortment: Check your sell-through percentage. Check to see if there are any items whose sale has declined drastically and if you are still replenishing or forecasting for them.

Strategies to optimize existing supply chain systems

Re-baseline your sales data for forecasting Most retailers would use a forecasting application for non-replenishment of items. These forecasts are typically carried out for items with a seasonal demand such as cold beverages in summer, gifts during holidays and different coloured apparel during summer, winter, spring and fall. The one main input to this forecasting is the historical sales information (either of the same or similar items). Typically, such sales information is plotted over a 3-4 year period and a statistical model is generated to give the forecast. Moving the average of sales would always result in a latency effect in the current scenario because sales have seen a downward trend in the last 18 months or so. But prior to that, sales were on a static and upward trend. If the tool is using a simple or weighted moving average, it would still show a higher forecast value. This can be simply verified by comparing the forecast and actual figures for the last few months at the store level. These can be fixed by simply changing the time period that the forecasting tool considers for the sales information and exclude the upward trend sales data. Optimise inventory distribution to your stores based on the days of supply Most retailers have seen a decline in same store sales with respect to the previous year. These figures vary from 2-12 percent depending upon the retail segment and individual stores. For example, the non-fresh category which is replenished every week, that is, the store has 7-9 days of supply before it starts encountering out of stock on items. The replenishment cycle for such items would have been set to 7 days, which means that on an average such category items are being replenished 52 times every year. If the sales go down by 2 percent in this category, then the store needs to be replenished only 50 times in the entire year. But the replenishment cycle would ideally have been set to occur on a

weekly basis, thus resulting in excess stock very often. Basically, retailers need to look at the replenishment cycles in each store for items that have had significant sale increase or decrease and rework the minimum maximum, threshold inventory limits as well as the replenishment schedule. The ideal way would be to look at the highest increase and decrease in sales of every product in each store and their replenishment threshold and cycle times. Increase flow-through merchandising in your DC Retailers need to start looking at the quantity of products that are stored in their warehouses. The lesser the amount of stocking, the more profitable they would typically become. They should also maximise the pallets and cases that are pre-packed for the store as long as these items do not have any value-added services in the warehouse. Since it is very time consuming to move towards complete just-in-time inventory, there could be sub-optimal solutions that can still be more beneficial. For example, products that need to be stocked in the warehouse can be pre-packed for stores by raising the order by at least 50 percent. This would help in carrying out the first replenishment round at a faster pace. Another scenario would be when all the cases or pallets are already pre-packed. Depending upon the day of the week, part of these can become a flow through for the stores that have outbound shipments scheduled. The rest can be kept as pre-packed items for the remaining stores and shipped to them once their dispatch schedule is ready. Logistics optimisation While optimising your replenishment cycles and increasing the flow through, you would also need to make changes to your warehouse, stores and transportation. If a retailer is planning to change his replenishment cycle and the inventory threshold of items, he should change the transportation schedule only after doing so, otherwise it would only increase inefficiency. Data required for this would include the number of trips per store per week, size of loads and trips that involve visiting multiple stores every week. As mentioned in the example for days of supply, it would be advantageous to change the trip to the store from every 7th day to every 8th day. This would require more planning on the stores side to receive the delivery, but would eventually decrease transportation costs. Re-examine the assortment One of the latest trends seen in consumer behaviour during the economic downturn is the movement of consumers from branded to non-branded or private label merchandise as long as there are no big value propositions. This is more applicable to the staple food category or daily wear apparel. Since typically, unbranded or private label products are available at lower rates, retailers can analyse their price point data and see if there is any shift in category. They would then need to increase the share of assortment of the lower price point or private label items and decrease that of higher price point items. They would also need to look at the shelf space allocation and stock fulfilment. Also, retailers should ensure that they are not trying to replenish items that are no longer hot sellers. Thus, using the right techniques of sales forecasting, simple merchandising techniques and tweaking your supply chain to optimally suit your business and sales, it is possible to reduce costs of transportation and storage.

Planning best practices within the industry

Hold owners of forecasts accountable for forecast accuracy Look for ways to systematically improve forecasting process Communicate forecasts to stakeholders in a timely manner Devote adequate resources to improving input data sources Reconcile competing forecasts within the company Use external factors to improve the accuracy of forecasts. These adjustments for external influences include weather, seasonality of products, competitive promotional activity, and market and competitive trends.

Financial & Merchandise Planning

Chain-wide merchandise planning translates high-level financial plans into specific financial plans within the merchandising hierarchy. Best practice retailers develop chain-wide plans at the company, division, department, class, and possibly sub-class level. Plans may also be totaled and tracked by GMM, DMM, and buyer or by other relevant reporting levels. Plans are developed at the season, month, and week level in units and dollars, although planning season may need to overlap. 1) Develop Initial Tops/Down Financial Plans. Establish annual financial targets; review and validate strategic direction; develop total chain, division, and department plans; refine projections. 2) Develop Initial Bottoms/Up Merchandise Plans. Using assortment plans and store clusters at the unit level, project sales, receipt flow, inventory, and gross margin plans by class. Roll-up to department, division, and company. 3) Reconcile Financial & Merchandise Plans. Compare the tops/down and bottoms/up plans. Identify and validate any plan variances. Review variance with management and finance, and reconcile plans. 4) Approve Plans. Using the plan developed above, plan additional variables and fine tune unit and dollar plans, revise as needed. Review with management for final approval. 5) Monitor Results. Establish Baseline Merchandise Plan. Review weekly results. Identify potential problems, as well as successes. Revise merchandise plans as needed, leaving the original baseline unchanged. The planning system should support revised plans.

Store Planning
Store planning is the process of developing plans and analyzing business performance by store, region, and market. Store plans serve as the basis for allocating non-replenished product, particularly seasonal and/or opportunity buys. They should be developed for each store grade and cluster, and location at a division and/or department level. Store plans are planned monthly and/or weekly to support the chain-wide merchandise plan and the assortment plan. Plans are reconciled to

the chain-wide plan and are used during the budget process. Plans are developed in units and dollars. The merchandise-planning group with store input develops the store plans. 1) Develop Store Targets. Initially, plan at the annual, quarterly and monthly level. Subsequently, break out plans by week. Review targets with store management. 2) Develop Store Department/Division Plans. Develop store divisional plans by month and week, store department plans by month and week, and class/sub-class level store plans by month and week. Review with store management. 3) Identify and Reconcile Plan Variances. Roll up the store department/division plans and compare to the chain-wide department/division plans. Identify and validate any plan variances. Review variance with management and finance, and revise if needed. 4) Revise Store Department/Division Plans. Revise plans, allocate plan variances, roll-up, and submit to management for approval. 5) Monitor Plans Weekly on an Exception Basis. Reforecast the plan, when necessary.

Assortment Planning
The appropriate merchandise characteristics and attributes are selected for each departments assortment and planned accordingly. Sample characteristics include fabrication, fashion trend, vendor, price point, color, size and theme. The attribute hierarchy is developed according to these characteristics. It should be based on the level of product substitutability and should be market driven. This hierarchy should provide alternative views, so that the merchandise can be analyzed in various ways. The characteristics listed below are evaluated as to what percentage each should contribute to the department total. You should attain this percentage breakdown within each classification. Fabrication What percent will each fabrication contribute? Fashion Trend-Weight What percent will each of these factors contribute to each classification? 1) % of Testing Trends, 2) % of Peak Trend, 3) % of Outgoing Trends Price Point Analysis What percent will each price point range contribute to each classification? 1) % of Opening price points, 2) % of Mid price points, 3) % of Better price points Color Balance What percent will each color range contribute to the classification? How important are basic colors versus fashion colors Vendor Analysis What key vendors will be utilized in each classifications purchases? The core assortment is then planned. This is the baseline assortment to be carried in all stores. The breadth of styles per attribute is planned, as well as the units per style. Typically, the top four styles within each classification should represent 55%-65% of the total classifications purchases. Assortment plans are created to support variations necessary to address different store clusters made up of store type, store size, store grade, customer demographics and competition. Assortment modules are developed according to store clusters. In a particular module, store attributes are linked to product attributes. A module can add breadth or depth to the core assortment. Many best practice retailers use store input to tailor the specific store assortments. The plan is rolled-up and checked against the Merchandise Plan and Space Allocation Plan. Assortment Planning breaks the merchandise financial plan into units, price points, dollars and specific SKUs. The plans are typically by week.

Assortment plans include the timing of deliveries, as well as exit strategies.

Store Grading and Clustering

Many best practice retailers use the process of Store Grading and Clustering to group their stores according to common characteristics. This is necessary for planning, allocation and replenishment in chains with large quantities of stores, and stores that are diverse. Clustering and Grading allows the retailer to buy for like stores together. Store Grading and Clustering is an ongoing process. Stores must be updated for relocation, remodeling, opening, closing, and changing environments. Store Grading is the process of defining stores group in terms of volume. For example, the highest volume stores are commonly graded AA. A low volume store would be graded a C or D. Store Clustering is the process of defining stores in terms of like attributes. Clusters are commonly based on store size, climate, store type, store location, customer demographics, psychographics and competition. Retailers use long-range weather forecasts from Strategic Weather Services (Wayne, PA) to help determine climate codes and minimize the risks associated with weather. Lost sales can be reduced by 10% to 30% when goods are sent to areas where there are weather opportunities.

Micro-Merchandising
In general, best practice retailers have a large percentage of merchandise that is considered core (60-80%), with 20-40% of the merchandise being tailored to the local store. Micro-Merchandising is an important tool for best practice retailers that have larger percentages of local assortments (3040%) and that operate in diverse geographic and ethnic areas. Micro-Merchandising works by defining local assortments for meeting specifically needs of the local customers, replenishing on a consistent basis, and allocating the proper amount of floor space. It also works extremely well when supported by a micro-marketing effort (i.e. locally or regionally tailored advertising and in-store visuals). Internal information on individual store performance is combined with external customer data, demographic data and psychographic data to provide an outside-in purchasing potential approach to planning and attribute development. Merchandise, customer and market information are analyzed together, in order to paint a more complete picture of sales. The combination of this data supports a correlation analysis that identifies performance patterns and emerging trends. Using this analysis, the retailer is able to respond to diversity in store, demographic and regional conditions with precision and manoeuvrability. Assortments are tailored specifically to local needs based on factual knowledge, and not just instinct on what would sell there. Micro-merchandising also allows for very detailed and precise store clustering. In addition, when combined with effective replenishment, the local assortment needs are supported by the appropriate stock levels that are needed to drive sales and meet local needs. Advanced data warehousing and data mining tools are required to store and manipulate the large amounts of internal and external data required.

Operations Metrics
Key performance metrics for retailers could be identified as: Walk-in to sales (Conversion)Ratio : The measure of number of people who walk into the stores within a pre-determined period of time (daily, hourly, monthly). Conversion is the percentage of customers who actually buy from the store. Conversion = (No. of Customers who make a transaction) * 100/ walk-ins (Shoppers Stop=25%) Average Transaction Value : The value worth of goods purchased by the customers. Avg. Transaction Value= Avg. Sales per day/ (Avg.daily walk in * Avg. Conversion %) Display to stock ratio: The amount of backroom inventory maintained as a ratio to that displayed in the store. Display to stock ratio = No of pcs of an SKU on display/ No of pcs of the SKU in backroom stock Sales per sq. ft. : The sales revenue generated per square foot of Retail space. Sales per Sq.ft = Gross Sales/ Retail space in sq. ft (Rs. 1898 for Shoppers Stop) Sales per employee : Measures the performance of the sales staff Sales per employee = Gross Sales / Strength of sales staff Inventory turnover rate : measures the number of times during a year that a company replaces its inventory. Inventory Turnover = Cost of goods sold/ (Average inventory at cost OR = Sales / Average inventory at sales Gross margin per sq. ft : The profitability of the Retail space. Gross margin per sq ft = Gross margin / Area of retail space

Pantaloon Retail v/s Shoppers Stop: Comparative study

Sales Growth
Pantaloon

sales have been growing at CAGR of 66.74% per annum as compared to Shopper Stop 31.76%
Consistent

growth in top line Sales

6,000.00

5,000.00

5,052.67

4,000.00

Sales in Cr.

3,328.77 3,000.00

Pantaloon Retail Shopper Stop

2,000.00

1,871.98 1,055.85 659.64 395 500 666 1,190 885

1,000.00

11

Inventory Turnover (Days)

Inventory Turnover Ratio
120 107 100 89 86 94 98 94 99 111 102

80
Days

60

Pantaloon Retail Shopper Stop

40

20

Inventory

is very high for both the players in Shopper stop and consistent in Pantaloon

Fluctuations Growing

ITR a cause of concern for Pantaloon

Asset Turnover Ratio

Good Concern

performance of Shopper stop about the reducing ATR for Pantaloon

Asset Turnover Ratio

3.5 3.1 3.1 2.7 2.4 2.03 Pantaloon Retail 1.62 1.36 1 1.23 Shopper Stop

2.5

2.6

1.96

1.5

0.5

Working Capital Blocked

Better CTCCT

Performance by Shopper stop is increasing for both of them; a thing of concern

Cash to Cash Cycle Time

90 85 80 70 60
Days

82 73 61 52 Pantaloon Retail Shopper Stop 70 59 71

56

57

50 40 30 20 10 0

14

Cost of Goods Sold as a percentage of Net Sales

Consistent Consistent
71.00% 70.00% 69.00% 68.00% 67.00% 68.61%

improvement over the stipulated period poor performance by Pantaloon

Cost of Goods Sold/Net Sales

69.36% 68.41% 69.56%

Percentage

66.54% 66.00% 65.00% 64.00% 63.00% 62.00% 61.00% 60.00%

66.52%

66.53%

64.89% 64.27% 63.31% Pantaloon Retail Shopper Stop

Employee Costs as a Percentage of Net Sales

Cost

of Employee as percentage of sales has been increasing consistently

Better

performance by Pantaloon
Manpower Costs/Sales

7.00% 6.61% 6.00% 5.67% 5.00% 4.17% Pantaloon Retail Shopper Stop 3.00% 5.76% 6.05% 5.99% 6.19% 5.42% 4.80% 6.58%

Percentage

4.00%

2.00%

1.00%

0.00%

Planning Process and Organizations

Supply Chain Management

Connect operational metrics to financial metrics

Profitability Revenue ROI

Cost Leadership Operational Excellence

LTStrategy

SCM - SCOR Continuous Improvement MM

PMS TQM- Training

Above the Snapshot of balanced scorecard and how the operational effectiveness could be used to improve the financial of the company. Refer to the above given metrics on Customer, Distribution, Sales and Marketing and how the parameter of the metrics originally improve the financial aspect of balanced scorecard. Retailers are facing unprecedented budget and performance pressures. The key to survival is staying ahead of competition. And that means ensuring each and every employee has the ability and the incentive to make good decisions in line with the overall corporate direction. This can be extremely difficult in a large organization that has multiple departments, levels, districts and regions, and where information resides in a variety of discrete information systems.

References http://retailigence.wordpress.com/2009/01/05/key-players-in-the-indian-retail-sector/ http://www.networkmagazineindia.com/200703/coverstory01.shtml http://www.gra.net.au/industries-retail.html http://www.retailing360.com/index.aspx?Page=article&sectname=Magazines%20%20Retail%20Insight&sectid=15&contentid=20090814200908141933537659bd2178a