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Introduction : FRM
Store Retailing Strategy
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Page # 51 Page # 97
Retail Maths Loss Prevention
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Page # 168 Page # 185
FDI in Retail
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Retail is derived from the French word retaillier, meaning to cut a piece off or to break bulk.
All the business activities necessary to sell goods and services to the final consumer. The final stage in the flow of merchandise from producer to consumer.
Global Retail Scene - Snapshot
Global retail market est. at US$ 7 trillion
US employs 22 million and is worth US 3 trillion Country India China Organized Unorganized Size
200 bil 325 bil
Top 10 Retailers World Wide
Prominent Players - International
Walmart - USA
Target - USA Carrefour - France
Sears-Kmart - USA
JC Penny IKEA - USA - Sweden
Tesco Ahold Metro
- UK - Netherland - Germany
McDonald‟s - USA
Sainsbury - UK
Indian Retail Market
Total retail market est. at Rs.1,000,000 cr. ‟05 Employs over 8% of national workforce Organized retail contributes only 3.5 % or Rs.35,000 cr. Estimated to grow to Rs.110,000 cr by 2010 Investment in retail sector to touch Rs.15,000 cr Total outlets 55,00,000 Per capita retail space 2.5 sft 96 % outlets are <500sft Online Shopping grown to Rs.1180 cr in ‟05
Prominent Players - lndian
Pantaloon Shoppers Stop
Barista Café Coffee Day
Where is it Happening ?
Delhi/NCR by 2007
Mumbai B‟lore by 2007 by 2007
50 Malls 22 mil sft
42 Malls 19 mil sft 14 Malls 6 mil sft
13 Malls 4 mil sft
Retail Environment in India
Absence of proper Town Planning Poor infrastructure – water, roads, power, communication, waste Multiple mandatory / govt agencies to cope with Real estate market exhorbitant & not organized Poor national supply chain – quality , commitments , productivity, temperature, ancient practices Shortage of skilled manpower at all levels.
S KUMARS RAYMOND
MUSIC WORLD FAST FORWARD
LIFESTYLE PLANET FASHION
6 million retail establishments in India 6.6 % urban adults are shop owners
8-10% adults employed in retailing
15-20% of work force employed in retail sector Total retail trade in india-7 lakh crore to 8 lakh crore or $180 billion Organised retailing – 13,300 crore growing by 28% per annum.
THE INDIAN CONSUMER
India‟s GDP among highest Purchasing power parity- 4th largest economy Second populous nation I/6th of the gobal population is in india Increased house hold incomes Socio-economic classification70-80% lies in low, middle class 20-30% account for the high purchasing power
Towns with population of 10 lakh + increased
Traffic congestion/parking One stop shop -choice
Exposure to new ideas/desires fuel consumer demand
Aspirations of consumers
Explosion of brands in each sector
Size variations of packs Many respectable brands in world has operations in India Need for shelf space to accommodate –growth of retail
< 2 hrs per week
Women spend more time Socialising-liesure time-clubs
17% non-grocery shoppers eat out
24% grocery shoppers do grocery shopping side by side
43% meet friends for going non-grocery shopping
RETAILING FORMAT IN INDIA
Ranges from 60,000 sq ft to 7,00,000 sq ft and above. Examples include Shoppers Stop, Pantaloon. Specialty Stores: Chains such as the Bangalore based Kids Kemp, the Mumbai books retailer Crossword, RPG's Music World and the Times Group's music chain Planet M.
RETAILING FORMAT IN INDIA
As the name suggests, discount stores or factory outlets, offer discounts on the MRP through selling in bulk reaching economies of scale or excess stock left over at the season. Department Stores: Large stores ranging from 20000-50000 sq. ft, catering to a variety of consumer needs. Further classified into localized departments such as clothing, toys, home, groceries, etc.
RETAILING FORMAT IN INDIA
Hyper marts/Supermarkets: Large self-service outlets, catering to varied shopper needs are termed as Supermarkets. These are located in or near residential high streets. Convenience Stores: These are relatively small stores 400-2,000 sq. feet located near residential areas. MBO‟s: Multi Brand outlets, also known as Category Killers, offer several brands across a single product category. These usually do well in busy market places and Metros.
Wheel of Retailing - Evolution
Starts with low price & service
Attempt to attract additional TG, raise prices, change product / pricing mix & format, better locations, makeover & refixturing Trading up leads to higher cost higher price New low price retailers enter & threatens existence
Achieved Target:Successfully reestablished its place in the market, with opening 22 stores.
Higher development – In fact the highest of all segments and categories.
Enhanced brand image from small to huge format flagship.
Wishes People should enhance living standard, moving to mono-brand from multi-brand outlets. Excellent training and salaries to sales staff and be more mass-oriented. Expand in 5 lakh plus towns, providing similar buying experience. Looking for continues support from the consumers and to emerge as fastest evolving brand.
To enhance team‟s performance in coming years.
Achieved targets:Take a lead in the dress-up segment that features dressing for occasion, success etc in trousers, and also in men's suits. Concentrated on top around 70 MBOs and trying to deliver better. Enhancing perform of team – planning to establish systems to make them more productive and glad.
Wishes:To implement system for on-time deliveries. To put scissors on product assortment in terms of the number of styles – which will led company to serve better to fewer customers. Excellent outsourcing with making dedicated team to take care of it.
Achieved Targets:In a span of less than two years, Daks brand has been successful to hit the Indian market despite of being a foreign brand. Managed tie-up arrangements for manufacturing Daks brand in India and Central Europe. Also signed agreements for Trussardi and Savile Row.
Wishes:To be a front runner in the Indian apparel market.
To add 25 more stores.
Allure entire high-end women class to wear Trussardi.
Enhance sales staff performance.
Achieved Targets:Signed agreement with Reliance Signed license agreement for its kidswear brand „Levi's Sykes‟. Increased production capacities at Daman and Baddi.
Wishes:To get recognition as global brand in the international market. To create a different brand identity for all in related segments. Establish entire lifestyle stores for kids, under the brand Gini & Jony Pull down custom duties on accessories and fabrics etc.
Achieved Targets:Expanded product assortment mix and added knits, which was entirely woven product base before. Arranged tie-ups with some global brands, such as J Jill, Tommy Hilfiger, Hugo Boss and Marks & Spencer. Increased capacity to attain a 40% growth rate comparing to the previous year.
Wishes:To work close with fashion institutes like NIFT to revise and develop fashion trends. To introduce a brand, which is competitive, enduring and reliable product. To introduce specialized product assortment, featuring all-weather conditioner and change character consequently to match the consumer demands. To develop a stage where high-tech technology is available to small and medium scale producers so that they can enhance quality standards.
Achieved Targets Started Asset Management Companies. Launched Big Bazaars in remote towns like Sangli. Wishes:Reaching a target business of two and a half thousand crores in 2006-07 fiscal. Identify and present the consumers‟ fashion requirement. Dominate the in all fashion segments like lifestyle, premium and value. Introduce or acquire new brands in fashion. To rope-in best fashion industry veterans.
Achieved Targets:Emerged steadily in the market – launched stores at Ahmedabad and Ludhiana, and planning three more in coming months. Introduced new brand “Trumart” with three stores in Mumbai and four in Pune.
The IPO got oversubscribed by nearly 12 times that generated about Rs 108 crore.
Wishes:To Launch FDI for least lifestyle retail, this will lead Indian fashion designers to think globally. Create enhanced retail space for high-end retail. To make Fashion Alliance more practical and a reality to make sure that it gains momentum. To make fashion more affordable with a better ambience.
Achieved Targets:Launched EBOs for all brands. Successfully introduced new product assortment such as non-iron shirt in Park Avenue and new suit ranges to uphold brand image.
Also introduced kidswear collection
Wishes:To launch a magazine on fashion. Begin a fashion week.
Expand in US market.
To launch a website that talks about lifestyle and fashion.
Achieved Targets:Successfully introduced two brands: H2O Plus and CPS Clothing.
In a move to concentrate on expansion and new concepts for brands, the company has signed agreements with global brands such as Nike and Levi's.
Launched MBO for leather shoes “Shoe Tree.”
Wishes:To present new concept, where both international and local brands can be presented under single roof. Expand product assortment in luxury, premium and affordable segments. Duty validation, especially in footwear which is at a 12.5 % as compared to apparel which is at only 4 %.
Validating countervailing duty (CVD) which is at of 60
The three keys to retail success -location, location &
The location of stores is a key concern to any retail organization ... whether it's your first store or your one hundredth. Spending time and money wisely in the process of site selection is critical.
Newcomers to retail often open shop in a location simply because it is the only vacant space within a stone‟s throw of their home or office.
How does one go about selecting a location for a store?
What kind of store are you planning?
What kind of merchandise will you be selling, at what prices and to whom?
What is the store offering customers in price, service, and convenience? What are the company's financial capabilities? Understanding company's image and restraints will be helpful in limiting the number of site choices.
Convenience Location Carts
Retail Merchandising Units. Tall Wall Units
Selecting A Retail Location
Developing the location plan requires a careful study of potential markets.
Market assessment begins by examining all regions or metropolitan areas, then choosing the one that appears to offer the greatest potential. Such a process is known as market selection.
Choices must then be made within the selected region or city. An analysis of the different sub-areas, or trading areas, of a city is then conducted. Finally, separate site analyses and evaluations must be made.
At this stage, management assesses the cost of land or rents, construction costs, traffic flow, etc.
Note that each step in this process is a refinement of the previous one.
Trading Area Analysis
During the process of market selection, management evaluates a variety of fact ors in the target regions. These include demographics, economic characteristics, the competitive environment, and the overall potential of the area. Population Characteristics Total size Age and income distribution Growth trends Education levels
Availability of management candidates
Wage levels Unions
Media Mix Issues
Type of media coverage Media overlap
Economic Characteristics Number and types of industry Dominant industry Growth projections Financial base Competitive Characteristics
Number and size of competition Competitive growth trends
Location Characteristics Number and type of locations
Access to customers Regulation Characteristics
Licensing Zoning restrictions
Index of Retail Saturation (IRS)
One of the more commonly used measures of market attractiveness is the Index of Retail Saturation (IRS). This index is based on the assumption that if a market has a low level of retail saturation, the likelihood of success is higher. In the following formula, a higher IRS indicates a lower level of saturation, thereby increasing the likelihood of retail success.
Trading Area Analysis
The trading area analysis takes place after management has selected a specific geographic region or section of a city as a possible retail location. “Trading area” refers to the local geography from which a store attracts the majority of its customers.
Trading Area Analysis
This territory is sometimes broken down into the “primary trading area”, which includes the majority of customers living within a certain range of the store and having the highest per capita sales; and the “secondary trading area”, which includes almost all of the customers situated outside the primary area. A typical shopping center may have a primary area that includes 75,000 customers within a five minute drive, and a secondary area housing 150,000 customers within 30 minutes.
License Plate Analysis
One of the most common methods of measuring a trading area with comparable stores is called auto license plate analysis. The license plate numbers of cars in the area under consideration are recorded and crossreferenced with public records to get their registration addresses. By plotting these addresses on a map, you can get a good feel for the general nature of the area.
Population characteristics are even more critical when evaluating a trading area. As in the larger market analysis, you must understand such features as the population profile, density and growth trends in the target area. Variables such as gender, occupation, education, age, family size and ethnic breakdown are also important. If you sell young children's clothes, you‟ll want to know the number of local preschoolers. A craft store, on the other hand, will want information about seniors.
Potential Sales In A Trading Area
With the right data, you can forecast your potential sales in the trading area. Use this formula: Number of households in the trading area X Dollars per household spent on your product category
= Total market size
Total market size X Your % share of the market
= Your potential sales
Site analysis and evaluation is the third and final step in the selection of a retail location. As a retailer, you have three basic choices for a site:
Downtown core Free-standing location The following chart highlights the strengths and weaknesses of these sites. Location Type Potential Advantage Potential Disadvantage
Choosing A Shopping Center
Sales Per Square Foot
Total Rent Cost Per Shopper Analysis
Responsiveness of the Landlord
Sales Per Square Foot
Most shopping centers require tenants to report monthly sales figures. This valuable data makes it easier to compare malls and their rents. It also allows you to make more accurate sales forecasts. For example, let‟s say a mall‟s average sales for women‟s wear are $300 per square foot and you are contemplating renting a 1000 square foot location. If you perform to the average, you would expect to attain a sales level of $300,000 per year.
Traditionally, malls will charge a minimum rent per square foot or a percentage of sales (whichever is greatest), plus a pro-rated common area and maintenance charge (CAM) per square foot leased. CAM expenses are the developer's total cost of maintaining the mall divided by the total allowable space for rent. They usually include the mall's expenses for insurance, real estate taxes, snow removal, maintenance staff wages, garbage removal, promotions, etc.
The landlord is asking $30 per square foot, or 6% of sales, plus CAM charges of $15 per square foot. Answer the following:
What would the minimum rent be for a 1000 square foot store? What level of sales would you have to achieve before you start paying the 6% overage? As a percentage of sales, what is your occupancy cost for a store that does $300,000 in this example?
What would the minimum rent be for a 1000 square foot store?
Rent Per Year = (Base rent + CAM Charges) x Sq. Feet = ($30 + $15) x 1000 = $45,000
What level of sales would you have to achieve before you start paying the 6% overage? This is known as the “break point”. Break point = Base rent x Square footage Overage percent = $30.00 x 1000 6% = $500,000
As a percentage of sales, what is your occupancy cost for a store that does $300,000 in this example? Occupancy % = Total Yearly Rent Total Yearly Sales = $45,000 $300,000
How Much Rent Can You Afford To Pay?
Based on the above table of occupancy cost, we see that a typical fashion store with an ending gross margin of 40% to 50% of sales should have a maximum rent threshold of 14%.
This means that, with annual sales of $300,000, the most it should pay for rent is $42,000 per year ($300,000 x 14%). To stay within budget, management must therefore negotiate a base rent of $27 per sq. ft.
Base Rent = $42,000 - $15,000 Base Rent = $42,000sq.$15,000 CAM = $27 per sq. ft. CAM = $27 per - ft. 1000 sq. ft. 1000 sq. ft.
Cost Per Shopper Analysis
One approach to determining the true “cost” of a location is to calculate the “cost per shopper”. The key here is to determine whether the traffic created at a particular site consists of your target customers or a more general customer base.
Location Fixed rent per year + Overhead + Advertising Total Costs
“A” $ 1,000 $ 9,000
“B” $ 2,000 $ 3,000
Traffic per Year
Cost per shopper
As you can see in this example, even though the rent at Location B is considerably higher than Location A, it is significantly more efficient.
Responsiveness of the Landlord
Directly related to the appearance of a retail location is the responsiveness of the landlord to the individual merchant‟s needs. Unfortunately, some landlords actually hinder the operation of their tenants' business by restricting the placement and size of signs, renting adjacent spaces to incompatible or directly competing stores, and forgoing maintenance and repairs.
By these actions, landlords can cripple a retailer‟s attempts to increase business.
Self service food store Groceries, meat, other products Limited health, beauty, general merchandise Low ad cost Every day low pricing
3000-8000 sq ft Limited variety / assortment of general merchandise Prices higher than super markets For convenience/ Quick purchases
Big box food retailers
Super stores Large super markets 20,000 to 50,000 sq ft
Food based retailers 30,000 to 100,000 sq ft
Non food items like flowers, health care, beauty aids, utensils, etc., Account for 25% sales
Warehouse type stores
Discount food retailers No- frills environment
Less / no service / ambience Merchandise is bought at special deals
One size and one brand per item
Same size and brand may not be available next time
International General Merchandise Retailing
Department Stores Specialty Department Stores
Concentrates on limited no. Of merchandise
High level of service Area less than 8000 sq ft
Sales expertise Niche markets-wider assortment
Broad variety deeper assortment Organised separate departments Considerable service
Sales person to assist
Point of sales terminal to transact Higher priced due to –
High costs of fashionable merchandise
High level of service Personel selling
Major tenants of malls
Liberal spending www.vasantkotharl.com on visual merchandising
Specialty Department Stores
Department store format Focus mainly on apparel
speciality department stores that sells substantial portion of its merchandise on weekly promotions Concessionaires Leased area in department stores
Full line discounter
Category specialists Home improvement centres
Off price retailers Catalogue showrooms
A successful retail store is nothing more than a series of well connected and thought out plans, ideas and processes.
The retail marketplace has fast become the domain of those who know how to use core strengths to dominate. Successful retail strategies are based on four primary areas: 1) Product Selection 2) Convenience 3) Shopping Experience 4) Price
To dominate marketplace based on Product Selection, one must have either the largest and widest selection of a product category imaginable (think Home Depot), or merchandise that is so unique people will seek you out (think Build-ABear Workshop).
The reality is that very few retailers have the resources to dominate the market based on a vast product assortment.
It requires a tremendous amount of retail space, and even more financial resources. As well, the market continues to sub-divide and become more specialized. You need to determine where your product selection fits on this scale: Convenient Competitive Dominant
If the majority of consumers think of your store first when they‟re interested in your product category, then you are the dominant player based on Product Selection.
Many retailers establish their position in the market based primarily on their Convenience (think of convenience stores and many pharmacies). Convenience is achieved predominantly through one of three avenues:
Hours Mass Assortment
Let‟s face it ... most retail shopping experiences are boring. This strategy involves the creation of a shopping experience that is not only positive, but (more importantly) memorable. It encourages word-of-mouth marketing. Numerous retailers have created successful concepts based on Shopping Experience.
Your Shopping Experience strategy will be driven by two important factors:
A unique, environment. exciting and inspiring store
Staff that provide exceptional entertainment and service.
It‟s pretty tough to achieve dominance in this area, but being the price leader is still a valid strategy. However, don‟t just think about being the lowprice leader. The other end of the pricing spectrum also presents an opportunity (albeit a narrow and risky one).
Low-price leader High End
Product, Convenience, Shopping Experience and Price ... in your marketplace, are you the very best in one of these areas? If you don‟t dominate at least one and perform well in another, you probably aren‟t having the success you need or want. Let‟s examine the components of store‟s strategy and discuss how you can become a store “worth shopping at”.
Store location is an essential element of retailing strategy. For years, experts argued that the three most aspects of any retail business were:
Merchandising drives the core retail business. If you don't have a handle on merchandising strategy, then you're out of the game already. To quickly summarize strategy options, consider the following choices: Low-price leader versus Higher prices. Narrow, highly specialized product focus versus Broader, more general assortment. Basic, standard items versus Unique, leading edge selection.
All retailers have a basic philosophy about how to price their products.
What is more important is that they create and stick to a pricing strategy that conveys a clear message to the consumer. The market has certainly developed a need for all retailers (even those at the higher end) to become more value-oriented.
Here are strategies: some examples of value-pricing Frequent Shopper programs Regular pricing, frequently "on sale" Added values
Everyday low price Price guarantees
Retail is a business that is built on the skills, abilities, attitudes, commitment and dreams of people. Personnel strategy will greatly influence success in this area. Training is always a key issue, but it rarely gets the attention it deserves. Pay and incentives play a major role in your personnel strategy. In developing competitive strategy, remember that one must strive to maximize sales and profits every area of business. www.vasantkotharl.com
Running the advertising and promotion element just by seating is a route to disaster.
By developing a proper and well thought out promotion strategy, you can begin to gain control over your marketplace and the message you are sending to your target customers.
You must determine the level of personal service you want to provide in your business. Here are your options: Are you a full service store where the customer is pampered?
Are you a completely self-serve store where customers are left to fend for themselves? Or, are you somewhere in between?
People are goal-driven creatures. Give them an objective they can identify with and want to achieve, then stand back and watch them work. This is equally true in the retail world. In setting goals for retail business, one should consider the following: The Owner‟s Personal Quality of Life Sales Profits Customer Satisfaction Suppliers Employees Image and Positioning
Defining Target Customer
Trying to satisfy the entire marketplace results in no one group ever being truly satisfied. One need to determine who is "best" customer group. This is known as Target Customer. That is not to say you won't have secondary consumer markets you will sell to, but rather that you need to build your store around your target customer profile. In the absence of such a target customer, strategies become weak, misguided and ultimately fail.
Watching The Trends
Uncontrollable trends do affect Retail business and there is nothing any one can do about them. However, what one can do is be aware of them and make plans for any changes they may create. By keeping an eye on these external events, anyone can often discover new opportunities ahead of the competition, or at least avoid significant economic loss from negative consequences. Consumers Government Policy Technology Competition Industry Economy
The Internet And Retail
Retailers are currently using the internet for a variety of functions, including:
Communication with suppliers.
Communication with customers.
Banking/electronic funds transfer. Purchasing goods and services online.
Selling goods and services online.
Merchandise Planning is "A systematic approach. It is aimed at maximising return on investment, through planning sales and inventory in order to increase profitability. It does this by maximising sales potential and minimising losses from mark downs and stock - outs."
It is a "systematic approach" in many ways.
Need the systems to ensure that one must have the right people, the right processes and the right computerised support.
It is "aimed investment“.
maximising return on
Most obviously we are talking about a financial outlay in stock, but less evidently there is also considerable financial investment in retail space, people and corporate infrastructure.
Achieve the goals "through planning sales and inventory". These two elements are inextricably linked and finding an optimum balance is the key to retail success. We need to balance carefully the requirement to support sales with the constraints and tensions imposed by store layouts and warehousing and transportation issues.
We put the effort into Merchandise Planning "in order to increase profitability".
Profitability is the key driver of most businesses. Effective merchandise planning delivers margin increases directly to the bottom line.
We achieve the increase in profitability "by maximising sales potential and minimising losses from mark - downs and stock - outs". There are two major areas of profit leakage in retail. Firstly lost sales resulting from lack of stock and secondly forced margin reductions due to excessive stock.
A typical retail clothing business will lose about 15% of its turnover in markdown and perhaps 10% due to lost sales.
If we assume a turnover of $100 million, then we are looking at a loss of $25 million here. Reducing each of these figures by 1%, adds $2 million to the bottom line. What is equally important it that this profit increase can be delivered in a sustained way. That is "Merchandise Planning".
In creating a holistic system it is helpful to realise that we can split the planning process into four logical sections Review
Merchandise planning Range planning
The review process consists of two separate activities.
Firstly carry out a Pre-Season Review of performance history to identify opportunities and problems. Secondly "normalise" it. Normalisation is the process of looking at history and ironing out the "bumps" to make it useful as a basis for planning.
The first element in the merchandise plan is the Strategic Plan. This is normally high level, with perhaps a five year timescale. It is used to set the critical success factors for merchandising in terms of sales, margins & stocks. Next is to create a Channel Sales Budget. This would allow us to take into account the effect of new channels, new stores, closures and refits.
Once complete we would create a Category Level Margin Plan.
Here we are creating a weekly version of the strategic plan at category level for sales, margins and markdowns.
In Assortment Plan, break down the goals of the merchandise plan into specific lines, or sometimes SKUs. In Distribution Planning, the lines that are planed are given a distribution profile. From this we should be able to see both which stores a line is ranged to, and which lines a given store will receive. The link between available physical space and ranging done here is a key determinant of merchandise performance.
Space planning systems can be split into two types - numeric and visual.
Numeric planning systems simply allow users to take account of space available and to calculate ratios like return on space.
Visual systems allow users to create 3 dimensional walk-through models of the stores and to preview the look of a store once ranging decisions have been made.
Open to Buy
An Open to Buy control system uses planned sales forecasts and stock turn requirements to determine the optimum level of stock required. In fact, given the extended lead times between order and receipt in fashion merchandise, this might more properly have been called an Open to Receive, as it really shows the amount of merchandise still required for intake in the given period.
The stock turn requirement is normally expressed in terms of Weeks Forward Sales Cover. Weeks Forward Sales Cover means the number of weeks' future sales that we need to keep in stock. There is a direct link between Weeks Cover and Annual Stock-turn. For example 26 weeks cover is equal to an Annual Stock-turn of 2 in a 52 week year. As some systems are based on periodic or monthly data one must see the terms Periods Cover or Months Cover used.
Open to Buy systems normally operate using a flow calculation. This is also known as a "ladder plan". This is shown in the following simple, unitbased, example where the Closing Stock for the first period is a result of adding the Opening Stock, On Order and Open to Buy, and then subtracting the Forecast Sales. This closing stock then becomes the opening stock for period two and so on.
Period Opening Stock Forecast Sales Periods Forward Cover Closing Stock Reqd
3 500 400 200 200 500
3 450 100 100 0 450
3 350 100 100 350
3 300 100 100 300
3 300 100 100 300
3 300 100 100 300
On Order OTB Remaining Closing Stock
6 month Merchandising Plan
The goal of a business plan is to minimise the use of capital and maximise profits. The merchandise plan is one of the most important “tools” to support this effort. The merchandise plan consists of 2 major elements. An estimate of merchandise needed. A control method to regulate stock levels.
Larger the organisation, greater the need to plan. Dollar Plan is also known as 6 months merchandise plans. This is because we generally do merchandise planning for 2 different periods. Feb to July Aug to Jan. These periods are divided in this way because each of these period contains 2 major related seasons – Spring, Summer & Autumn, Winter
Dollar Plan & Control
Dollar plan is actually a budget which balances planned sales and planned stocks in terms of dollars. It also includes standards, if achieved, which would result in a planned profit”
“ The Control feature is known as the open-tobuy i.e. the dollars that a buyer may spend for delivery of good within a period.
Dollar Plan & Control
Dollar Planning and Control consists of:
A prediction of customer demand for each month of the plan.
An estimate of the inventory need for each month of the plan.
The maintenance of planned inventory levels by means of a control feature.
Elements of the Dollar Plan
Planned Sales – estimates for each month and the period.
Planned Stock – estimated inventory need at the beginning of each month. Planned Markdowns – reductions for each month estimated inventory
Planned Purchases – estimated purchase budget to be spent during a given period.
Elements of the Dollar Plan
Since a plan is also a set of financial goals. It may include planned figures for: Workroom Cost – cost of alterations and repairs of garments that are charged to a department. Cash discounts – percentage of the period‟s cost purchases (discounts earned through early or prepayment of accounts payable) the ratio is a percentage of net sales. Season Stock Turnover – net sakes divided by the average inventory.
Elements of the Dollar Plan
Shortage – Difference between book inventory at retail and physical inventory in terms of retail values. The shortage ( or overage ) is expressed as a percentage of net sales.
Average Stock – beginning of the moth inventories divided by the number of months of the period. Markdown – Dollar reductions from originally set retail prices of merchandise, a percentage of net sales.
Elements of the Dollar Plan
Percentage of initial Markon – difference between costs and first retail prices, expressed as a percentage. Newspaper Advertising – shown in dollars or as a percentage of net sales, or both.
Gross Margin Percentage – difference between the cost of goods and the amount of sales, expressed as a percentage.
In preparing the six month merchandising plan, larger retail chains will build from the bottom up.
Starting at the class level, each class of merchandise will have its own plan. Combining entire subclasses will give us the strategy for each department.
Taking that one step further, the amalgamation of all department strategies will give the total company plan.
Completing Six Month Merchandise Plan
Step #1: Assemble Last Year’s Figures Assemble and fill in last year‟s results. Unless operation is computerized, however, getting most of the monthly data for plan will be impossible. In such cases, simply begin with six month or even annual figures, then divide by the relevant number of months. Or just take an educated guess.
Step #2: Planned Sales Sales planning is the most difficult step in the whole process. In the real world, however, start by reviewing last year‟s figures and trying to determine what might affect performance this year. Some things to consider are: Sales Season Performance Coming Into The
How is Customer Changing? Economic Factors
Step #3: Planned Reductions
Markdowns, employee discounts and inventory shrinkage come under the heading of planned reductions. These three figures affect ending gross margin, so they must be considered when calculating department and class profitability. Since they also affect inventory levels, they must be projected to ensure enough merchandise is on hand to attain forecasted sales levels.
Step #4: B.O.M. & E.O.M. Planned Inventory Levels
Planning End-of-Month (E.O.M.) or Beginningof-Month (B.O.M.) inventory levels (one month‟s “ending” is the next month‟s “beginning”) is another important element of the six month merchandise plan. Inventory is by far the number one dollar asset within the company, and careful planning is required to ensure an adequate return on investment is attained.
Stock-to-Sales Method The Stock-to-Sales Method is a popular way to forecast how much inventory is required to attain monthly sales projections. Stock-to-sales (S/S) is a ratio of the amount of inventory on hand at a particular date to the sales for the same period, and is calculated as follows:
S/S ratio = Stock on hand E.O.M (at retail value) Sales for the same month
When using the S/S method for planning stock levels, the buyer selects the S/S ratios he desires each month.
Desired S/S ratios are usually obtained by referencing previous seasons. The selected ratio is then multiplied by the projected period sales to get the desired E.O.M inventory level. For example, the E.O.M. chart on the following page is from the sample six month plan:
The Stock-to-Sales Ratio also provides with an estimate of what Inventory Turnover will be. If S/S Ratio is Estimated Annual Inventory Turnover is
2 3 4
6 4 3
Step #5: Inventory Stock Turns Inventory stock turns measure the rate at which merchandise is sold from store compared to the inventory level on hand. The higher the rate, the more profit the buyer brings to the company and the better cash flow will be. Stock turns are calculated by dividing the total sales for the season by the season‟s average ending inventory (at retail value).
Using the sample six month merchandise plan, the season‟s average inventory and stock turn rate is calculated in the following way: Season Average Inventory = Sum of E.O.M. Inventory Months in Season
= $110,000 + 140,000 + 150,000 + 170,000 + 140,000+90,000
6 = $800,000 6 = $133,000
Stock turn rate = Total sales for season Season average inventory = $310,000 $133,000 = 2.33 times for the 6 month season
Step #6: Gross Margin Return On Inventory Investment (GMROII) While the standard Inventory Turnover ratio tells you how efficiently you are moving your inventory, it ignores the profitability of this inventory movement. For example, an item with a low gross margin and high sales will show a higher turnover rate. However, this is obviously not as desirable as moving inventory with higher (or even average) gross margins. Basically, it produces a lot of activity, but with fewer financial results.
Gross Margin Return On Inventory Investment has become the standard inventory statistic for many retailers because it reflects the movement of inventory relative to profitability, rather than to sales.
This is a better measure of inventory performance because retailers are more interested in profitability than sales. A savings bond that pays 8% is better than one that pays only 3%. Similarly, inventory that provides you with a higher rate of return is more desirable.
If we were to look only at Inventory Turnover rates, we would say both departments perform equally.
However, as soon as you calculate GMROII, you can clearly see how clothing outperforms bikes. The minimum standard for GMROII in most retail operations is 200%. Anything less is considered to be unprofitable.
Step #7: Planned Purchases Once sales projections, stock reductions and stock levels have been established, retailers can calculate planned purchases. The planned purchase figure is also the buyer‟s first "open-obuy" estimate. Using the August figures from the sample six month plan, the formula for planned purchases is as follows: Planned Purchases = EOM Inventory + Sales + Reductions - BOM Inventory = $110,000 + $35,000 + ($1750+ $350 + $700) - $50,000 = $97,800
Step #8. Planned Markup After calculating how much inventory to purchase, retailers must determine the initial markup for these goods. This may fluctuate between different classes of goods within a department. The original markup must allow for a final profit after paying all operating costs, reductions, cost of goods, etc. Most retailers have a target markup they want to start with. This markup percentage is calculated by dividing the markup in dollars by the retail price.
Markup dollars is the difference between the cost price and the selling price. i.e. Our shoe store buys men's slippers for $10 and follows the manufacturer's suggested retail of $20 which is a 50% markup percentage, otherwise known as gross margin.
Markup dollars = Selling price - Cost price
= $20 - $10 = $10.
Markup percent = Markup dollars / Retail Price
= $10.00 / $20.00 = 50%
Step #9: Gross Margin
Gross margin is the difference between the selling price and the cost of the product, less reductions for markdowns, shrinkage and employee discounts. To determine the gross margin for each month, all purchases and inventories must be converted to cost price. To calculate cost price, multiply the inventories and purchases by the original markup percent (in this case 50%).
Example: Using the month of August from the six month plan, we must first convert to cost figures by multiplying opening/closing inventories and purchases by 50%. Next, we calculate (C.O.G.S.) as follows: Cost of Goods Sold
C.O.G.S.= B.O.M. Inventory + Purchases E.O.M. Inventory.
= $25,000 + $48,900 - $55,000
Finally, we determine Planned Gross Margin like this: Planned Gross Margin = Period sales - C.O.G.S. Period sales = $35,000 - $18,900 $35,000 = 46%
There is dispute among segments of the retail industry as to the retail math terminology and calculations used in the business. There is definitely a need for a "common language" for the industry as it pertains to calculations and terms! Retail math is considered an integral part of a good retail manager's skill set.
It can be found on some companies preemployment screening tests.
$ Cost = $ Retail x (100% - Markup %)
Example: $100 retail item with 56% markup has a cost of $44 (100% - 56% = 44%) $100 retail X .44 = $44. Note: This retail math formula is useful for calculating the most you can pay for an item you need to retail at $100, but want a markup of 56%. Use this retail math formula in cost negotiations with vendors.
Cost of Goods Sold (COGS) = Beginning Inventory + Purchases - End Inventory
Inventory at beginning of year + Purchases or additions during the year = Goods available for sale Inventory at end of year = COGS
Inventory @ cost Beginning of year = $1,000,000. Purchases @ cost + freight During year = $550,000. Total available $1,550,000. Cost of Goods Sold =($1,550,000 - $900,000) = $600,000. ($1,000,000. + $550,000.) =
Inventory On Hand end of year @ cost = $900,000.
$ Retail = $ Cost / (100% - markup %)
Example: Cost on an item is $44. Desired markup is 56%. 100% - 56% = 44% cost complement to the retail markup. Cost $ of $44 is divided by cost complement of .44 to arrive at target retail price of $100. ($44 divided by .44 = $100)
Note: This retail math formula is used to determine the retail price to mark an item, when the cost and the desired markup % is known.
$ Markdown = Original retail price - lower retail price
Example: Original retail price $100. New lower price $80. The markdown is $20. This 20% discount becomes an markdown expense of 25% because the $20 must be divided by the $80 sale to be expressed as a % to sales, the way other expenses are expressed as a % to sales.
GMROI (Gross Margin Return on Investment) = Gross Margin $ / average inventory at cost.
Annual Gross Margin $ of $400,000 with an average inventory cost of $150,000 would have a GMROI of $2.67; in other words, for each dollar invested in inventory on average, the $1 invested returned $2.67. ($400,000 divided by $150,000.) This is a particularly important retail math formula. Most retailers do not pay enough attention to GMROI).
(Gross Margin% / (100% - Gross Margin %)) x Annual Stockturn In simple terms it shows how many times over a year we get every penny we invest in stock at cost returned as profit. So if Product Group A has a gross margin of 60% and an annual stock turn of 1.8 this would give us a G.M.R.O.I of 2.7. (60/40 x 1.8 = 2.7) If we compare this with Product Group B which has a gross margin of 40% but an annual Stockturn of 4.0 we see that the G.M.R.O.I. is also 2.7. (40/60 x 4.0 = 2.7) Product Group C has the same Gross Margin and the same Stock Turn as Product Group B, but is driving through only half the sales value.
Product Group A
Product Group B
Product Group C
Sale Units Sales Gross Margin % Gross Profit Average Stock - Retail Annual Stock Turns
180 1,800 60.0% 1,080 1000 1.8
200 2,000 40.0% 800 500 4.0
100 1,000 40.0% 400 250 4.0
GMROII = GM% x (Sales / Avg. Inventory)
Example: Assume that the store's net sales over a period of 12 months is 24M and during this time it carries an average inventory of 6M. Then: GMROII % (Gross Margin Return on Inventory Investment (GMROII): = 39.94 x (24 / 6) = 159.76%
Gross Margin = Sales - cost of good sold
Margin % = ($ Retail - $ Cost) / $ Retail
Markdown % = $ Markdown / $ Net Sales
Percent Change In Sales = This Period Of Sales - Last Period Of Sales Last Period Of Sales
Example: This period sales = $1,000,000. Last period sales = $900,000. Percent Change in Sales Increase of $100,000 divided by last period sales of $900,000 = 11.1% increase.
Stock Sales Ratio = B.O.M. $ Stock / Sales For Period
Example: As in example above, a B.O.M. stock of $400,000 retail divided by that month's sales of $100,000 = a stock to sales ratio of 4.0 to 1. ($400,000 divided by $100,000).
B.O.M = beginning of month inventory. This is one retail math formula which can vary – many companies look at cost inventory- not retail, when computing turns.
Planned Stock = Planned Monthly Sales X Stock Sales Ratio
Example: Planned monthly sales of $100,000 X planned stock to sales ratio of 4.0 = a planned first inventory of $400,000. of (planned) month
Averaging a 4 to 1 stock to sales ratio each month (4 months supply on hand) will result in achieving retail inventory turns of 3 per year.
Shrinkage = Difference Between Book And Physical Inventory
Breakeven = Fixed Costs $ (Net Sales - Contribution Margin %)
The Contribution Margin % (CM) is the sum of the Variable Expense % + Cost of Goods Sold % after the impact of markdowns. Breakeven Analysis: Simply stated, this formula indicates how much sales volume must be accomplished in order to cover all costs (fixed and variable), and begin generating a profit. In other words, it is the point in sales volume at which you have no profit and no loss.
"Loss Prevention" is not a very glamorous part of retail.
It is, however, an extremely important element of the success equation. Call it theft or shrinkage is all lost dollars ... and each one of these dollars would otherwise be 100% pure bottom-line profit.
General Breakdown: Shrink
33 % Employee 21% Admin. & Paperwork 8% Vendor
1 in 12 people in the US is a shoplifter and a shoplifter will commit an average of 50 thefts before being caught. What is worse for retailers is that this represents close a 5 Billion dollar loss to shrink.
Shrinkage Rates by Retail Sector
The loss that results from shoplifting and employee theft.
Shrinkage is reduction in physical count of inventory as compared to accounted value.
Assume that an employee takes a pop, chips, and a candy bar from the bookstore without paying for their products: Cost to bookstore of items taken: Pop 0.93 Candy 0.33 Chips 0.27 Total $1.53
Markup of items to Cover Shrinkage Pop 0.32 Candy 0.17 Chips 0.13 WE WOULD HAVE TO SELL 3 Pops 2 Candy 2 Chips
Shoplifting - Employees
3% steal every day
8% steal every week 20% steal 12 times a year
42% of all retail employees steal
80% of shoplifting management involved senior store
Less staff handling cash Staff integrity test
Covert work force to security force
Frisking & restricting personal cash to Rs 100 only
Types of Shoplifters
Professional shoplifters The needy shoplifters
The thrill seeking shoplifters
Shoplifters who are drug addicts The absent minded shoplifters
Temptation Most of the people have inside them the desire of getting something more than the basic needs that is desire for luxury items. The basic desire is to get something extra without giving something in return for it. Justification Most of the shoplifters do not consider themselves to be criminals and shoplifting as crime. Generally in order to justify their act they frame their own set of values that suit their act.
“One will miss the things I took.” “It is ok to shoplift sometimes as I have also give much money in the past for my purchases.” “The queue for the billing is very long and I don‟t have much time for it.” “Retailer has put the price quite high than the normal prices.” “There are many people unlike me who shoplift.” “It is my right to possess good things and it is not necessary that I pay for it everytime.” The above list justifications are just the tip of the iceberg of excuses shoplifters give forstealing.
Motivation Motivation leads to action. The primary motivation for stealing is that no one is watching them and they are not hurting anyone and this act of them will not lead to negative result. They are under the impression that the retail store can easily afford the loss due to shoplifting and thus their stealing has no effect on the shopkeeper and society. Also believe that it is a harmless activity.
Recognize The Shoplifter
They spend less time for shopping and more time observing the cashier or salesman.
Their dressings is huge and wear heavy clothes like blazer or overcoat even when it is hot. Watch out for their body language that is they tend to walk awkwardly with short steps which denotes that, they are trying to hide something. They take many items in the trial room and when they come out have only one item with them.
Recognize The Shoplifter
Sometimes such people become too selfconscious and nervous. They shop without interest and pick up the items randomly. There visit to the shop is quite frequent but do not make any purchases. Sometimes shoplifters enter the store/mall in groups especially the teenagers. One of them strikes heated conversation without any relevance in order to distract attention from other members of their group.
Shrinkage $ = Book Value of Inventory - Actual Inventory on Hand
Shrinkage % = Shrinkage $ at Retail Values Total Sales
From the above information, calculate the dollar shrink figures for each department and the % shrink figures this represents. What department has the biggest shrink problem?
Let's say you received some earrings from a supplier and originally put them into inventory at $10. You received 15 pairs, so you added $150 to your inventory level. Now, you realize that the earrings should have been priced at $12. You have to change your tickets to reflect the new price. As well, you must post your mark up of $30 (15 pairs increased by $2/pair) to your inventory. So the value of your inventory just increased by $30. That's a mark up calculation and recording.
You have two ways to record markdowns. First, you can record them when the merchandise is sold. So, if you reduced the price of a handbag from $30 to $25, you would record a $5 markdown when the bag was sold. The second recording method is what we call a “one time markdown." If you were reducing the same handbag from $30 to $25 and you had 10 bags in stock, you would record an immediate markdown of $50 (10 bags reduced by $5 each).
Radio frequency Identification (RFID has been around since World War II). The technology used in RFID has actually been around since the early 1920‟s. A much more related technology, the IFF transponder, went into operation in 1939 and was routinely used by the British in the World War II to identify airplanes as friend and foe. RFID became reality after 3 years of advances in many different fields.
In simple, RFID tags consist of silicon chips and an antenna that can transmit data to a wireless receiver. Therefore the radio Id tags do not receive lineof-sight for reading that is the RFID tagged product need not be held close to the scanner to read the data of a RFID tag. Within the field of a wireless reading device, it is possible to automatically read hundred of tags a second.
Radio Frequency Identification (RFID), the technology of the future, has long established itself in our everyday lives. It is already deployed in various areas ranging from efficient inventory management and road toll collection through to timing the performance of individual participants in mass sporting events. With its enormous potential it is only right that RFID is on everyone's lips.
RFID technology builds a bridge between the physical world of a product and the virtual world of digital data. The technology thus meets the demands of companies cooperating in a closely knit value chain and is being deployed promisingly in all sectors of the economy.
RFID will soon be considered an indispensable part of the chain.
RFID - An Overview
RFID or Radio Frequency Identification is a system that uses radio waves to transmit an object's identity. There are several methods of identifying objects using RFID, but the most common is to store an ID or serial number that identifies a specific product along with other information, on a tag, which is a small microchip attached to an antenna. The antenna enables the chip to transmit whatever identification information it contains to a reader.
The reader converts the radio waves from the RFID tag into digital information that software systems can use for processing. Typically, when a reader reads a tag, it passes three things to a host computer system: the tag ID, the reader's own ID, and the time the tag was read. By knowing which readers are in which locations, companies can know where a product is, as well as what it is, and by tracking the tag data by time, they can know everywhere it's been.
Until recently, a bar coded item used to sit on a retail shelf and did not generate any data until it was scanned by a bar code reader. And then the data was read only once. RFID, on the other hand, is a passive technology that does not require human interaction to scan. A reader can extract location and product description data from a tagged item every 250 milliseconds. Some readers are capable of reading data from 200 tags per second.
RFID tags can be classified into
Passive tags Active tags.
Passive tags do not have their own power supply.
The minute electrical current is induced in the antennas by the incoming radio frequency scan provides enough power for the tag to send a response. Due to power and cost concerns. The response of a passive RFID tag is brief – typically just an ID number. The smallest such devices commercially available measured 0.4mm x 0.4mm, which is thinner than a sheet of paper; such devices are practically invisible. Passive tags have practical read ranges that vary from about 10mm up to about 6 meters.
Active RFID tags, on the other hand, must have a power source and may have longer ranges and larger memories than passive tags as well as the ability to store additional information sent by the transceiver. At present, the smallest active tags are about the size of a coin. Many active tags have practical ranges of tens of meters and a battery life of up to several years
How different RFID is from Barcode??
Many retailers and manufacturers have been using bar codes. These are scanned manually and read individually. In the case of RFID tags, it is a small object similar to adhesive sticker and is attached to or incorporated in the product. RFID tags work better and more data can be collected and stored in the RFID micro chip. Further RFID tags cold identify exactly which box it is, which is lacking in barcode system.
Benefits of RFID
Product security and Quality
Real time inventory visibility (a check can be seen an unwanted qauntitities)
Exhaustive information about product and
Better mans of accountability
Factors Adverse for the adoption of RFID Technology Expensive technology: RFID tags at present costs between $1 and $10. Specialized tags costs still more may be $100. Passive tags are available at 30 cents to $1. Uncertainty about standards Read errors due to technology. Lack of awareness Technology issues
Environmental /process related factors include: Active /Passive, Frequency; low/high frequency tags, Mental proximity reverts the radio frequency, Liquid items tend to absorb the radio frequencies thus making it impossible for the reader to comprehend them, read range depends on the power of the antenna and read accuracy, Level of security, Size, Anti- clone/ Anti collision functionality, Humidity and temperature, Interference.
The use of RFID technology has engendered considerable controversy and even product boycotts. The four main privacy concerns regarding RFID are :
The purchase of an item will not necessarily be aware of the presence of the tag or be able to remove it. The tag can be read at a distance without the knowledge of the individuals,
If a tagged item is paid for by the credit card or in conjunction with the use of loyalty card, then it would be possible to the unique ID of that item to the identity of the purchase, The EPC global System of tags create or are proposed to create, globally unique serial numbers for all products though this creates privacy problems and is completely unnecessary for most applications.
Strategies for the rapid adoptions of RFID
Big retail formats are growing in India and hence RFID technology can be used for reaping the advantages identified in the above pages. During March 2005, wireless planning and coordinating wing, Ministry Of Communications and Information Technology, Govt of India had issued a notification for the use of wireless equipment in the band 865-867 MHz. As per the notice, no license is required to establish, maintain, work, and possess the tags and their uses.
Strategies for the rapid adoptions of RFID
Research is going on the substitution of cheap or cost effective material to make the technology, for example, use of nanotechnology makes the RFID technology cheaper. Govt. of India should bring a policy to make the use of the technology compulsorily in certain sectors namely, Education sector; universities and institutions should use the technology on the certificates by recording the basic details of that student hence it becomes easy for verification and there is no scope for manipulation.
Strategies for the rapid adoptions of RFID
Pharma sector; to avoid fake medicine brands standard companies can use this technology. Election Commission to issue voter ID cards, to avoid others to vote, this technology is very much useful. For very expensive goods such as jewelry, costly wrist watches, diamonds etc also, the manufacturers can use this technology, to avoid duplication in the market.
WHAT IS FDI?
FDI is defined as a firm based in one country (the 'home country') owning 10 percent or more of the stock of a company located in a foreign country (the 'host country') -- this amount of stock is generally enough to give the home country firm significant control rights over the host country firm. Investment made by a foreign individual or company in productive capacity of another country for example, the purchase or construction of a factory.
Investing in India
Prior Permission (FIPB)
No prior permission required Inform Reserve Bank within 30 days of inflow/issue of shares
Prior Government Approval needed. Decision generally within 4-6 weeks
Retailing: An overview
Retailing World‟s largest private industry US$ 7 trillion sales annually Indian retailing Contributing 14% to national GDP Largest employer after agriculture - 8% of population Highest outlet density in world Around 12 mn outlets Still evolving as an industry Long way to go
Indian Retail: “The Sunrise Sector”
Total retail market : 10 lac crores
Organized retail market: 3.5 % or 35,000 Crores Estimated to grow to Rs 1,10,000 crores by 2010
Total outlets – 55 lacs
Per capita retail space- 2.5 sq feet. (96 % outlets are < 500 sq ft)
The Changing Indian Consumer
Greater per capita income Increase in disposable income of middle class households 20.9%* growth in real disposable income in ‟99‟03. Growing high and middle income population Growing at a pace of over 10%* per annum over last decade Affordability growth Falling interest rates Easier consumer credit Greater variety and quality at all price points
The Changing Indian Consumer
The urban consumer Getting exposed to international lifestyles Inclined to acquiring asset More discerning and demanding than ever No longer need-based shopping Shopping is a family experience Changing Mindset Increasing tendency to spend Post Liberalization children coming of age 100 mn 17-21 year olds. Tend to spend freely. Greater levels of education
Current market size is roughly US$ 286 bn 96% of the 12 Million stores are less than 500 Sq. ft. Forecast Growth rate for the retailing industry is roughly 8.3% for 2003-2008 Sales from large format stores would rise by 2449% Formal and modern format retailing would enjoy rapid growth
Low domestic competition
Because of fragmented nature of industry
Lack of exposure to global best practices Low entry barriers for unorganized retailing
Moderate entry barriers for organized retailing
Wholesale system under-invested leading to 20-40% wastage Non level playing field issues Wide differences in treatment of small and large retailers
India As An Investment Option
India ranked 5th in the Global A.T Kearney Retail Development Index Second only to China (from 30 emergent markets) Least saturated of all global markets studied The least competitive of all global markets studied Implies lower barriers of entry for global players Considering tremendous market size, excellent potential for foreign players
FDI in Indian Retailing
Current Indian FDI Regime FDI not permitted in retail trade sector, except in: Private labels Hi-Tech items / items requiring specialized after sales service Medical and diagnostic items Items sourced from the Indian small sector (manufactured with technology provided by the foreign collaborator) For 2 year test marketing (simultaneous commencement of investment in manufacturing facility required)
Entry Routes To FDI In Retail
Present FDI Regime and Entry Routes. The Central Government in 1997 had taken a careful policy decision of keeping FDI in Retail at bay. But the present policy allows India to have a presence of international brands, through different routes as follows: Franchise Joint Venture Manufacturing Distribution Cash & Carry (100%)
International Retailers in India: Strategies
Franchise :Mc Donalds International company gives name and technology to local partner. Gets royalty in return In case master franchise is appointed for region or country, he has right to appoint local franchisees Nike, Pizza Hut, Tommy Hilfiger, Marks and Spencer, Mango
International Retailers in India: Strategies
Company sets up Indian arm for product Bata India. It also has right to retail in India
Foodworld :51:49 JV between RPG and Dairy Farm International
International Retailers in India: Strategies
Distribution International company distribution office sets up local
Supply products to Indian retailers to sell Also set up franchised outlets for brand Swarovski, Hugo Boss Wholesale trading Cash and Carry operations 100% FDI permitted Metro Cash n Carry
FDI : How??
FDI should be allowed in stages Initial stages: 26% FDI Establishment Phase: 49% FDI Mature Phase: 100% FDI FDI policy No incentives needed to attract FDI Market size and potential are sufficient inducers No need for costly tax breaks, import duty exemptions, land and power subsidies, and other enticements.
Foreign players would displace the unorganized retailers because of their superior financial strengths Induce unfair trade practices like Predatory Pricing, in the absence of proper regulatory guidelines Create Monopoly and promote cartels Give rise to cut-throat competition rather than promoting incremental business Increase in real estate prices and marginalize domestic entrepreneurs
FDI : Benefits
By allowing FDI in retail trade, India will become more integrated with regional and global economies in terms of quality standards and consumer expectations Greater level of exports due to increased sourcing by major players Provides access to global markets for Indian producer The international experience and skills that may come with FDI would provide the confidence and capital
FDI : Benefits
Investment in technology
Cold storage chains solve the perennial problem of wastage.
Greater investment in the food processing sector technology
Better operations in production cycle and distribution
FDI : Benefits
Greater level of wages paid by international players usually More product variety Newer product categories Economies of scale to help lower consumer price Increased purchasing capacity of consumers They can lay down better and tighter quality standards and ensure that manufacturers adhere to them.
FDI : Benefits
Manpower and skill development Through retail training and Greater managerial talent inflow from other countries Tourism Development A strong retailing sector boosts tourism as seen from the experience of Singapore and Dubai Investment in whole supply chain Improved product basket from India for exports Long term benefits Up-gradation of agriculture Development of efficient small and medium size industries
Benefits To The Government
Benefits To The Government
Increase employment levels FDI would expansion result in market growth and
Employment generated at various levels Increased consumer demand implies employment generation across the value chain
Vendors will be benefited through long-term contracts & associations, introduction of best practices in production, designing, labor conditions, waste/effluence management, volumes and export possibilities, better quality of life for rural masses through direct contract farming.
Infrastructures such as roads, power, sewerage, garbage disposal, public parking lots, real estate, cold chains, logistics & warehousing, flow of funds-public and private, import & exports. The environment is likely to be impacted first owing to global best practices by these brands who are likely to come over the nest few years.
Hence, it will lead to overall economic growth and create benchmarks.
Case study : Chinese retailing
FDI permitted in 1992. 40 foreign retailers have secured approval Retail sales have firstname.lastname@example.org% since FDI was permitted
FDI initially restricted to 6 major cities (including Beijing, Shanghai and Guangzhou and SEZs)
Foreign ownership initially restricted to 49%
US$ 22 bn of FDI attracted, 3.6% of total FDI
In 2003, FDI in wholesale and retail was US$ 1.1 bn (Around 30% of our total FDI in 2003)
Current restrictions on FDI will be phased out over 5 years as condition of WTO entry
China: The effect of FDI
Type Traditional No. of stores in 1996 1,920,604 No. of stores in 2001 2,565,028
Supermarkets Convenience Hypermarkets
152,194 18,091 593
Employment In Retailing Is Increasing
Employment in Retailing
Em ploym ent in Retail and w holesale (M n)
8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 90 91 92 93 94 95 96 97 98 99 00 01 Y ear Employment %
50 40 30 20 10 0
% of Total Labor force
Case Study : Chinese Retailing
Wal-Mart Entered Chinese market in 1996 Has 43 stores in 19 cities as on date Had sales of US$ 704 mn in 2003 Has employed more than 20,000 people Has paid taxes of US$ 111 mn in total*
Has 54 stores as on date Had sales of US$ 1.6 bn in 2003*
Lessons from China
Strong evidence in favor of FDI FDI improves the entire size of the industry Retailing in China has grown at a compound rate of 15% per annum after FDI inflow Employment growth Evolution of modern formats Local players can survive and even beat foreign competition Need for a strong retailing industry in India Scale is the key to success for local retailers
Grant industry status to retail. Permit FDI in Retail in phases.
Invest in supply chain infrastructure.
Organize market for real estate Ensure flexibility of labor laws
FDI should be gradually allowed first in relatively less sensitive sectors – garments, lifestyle products, houseware, entertainment etc.
Entry of foreign players must be gradual and with social safeguards so that the effects of labor dislocation can be analyzed and the policy can be fine-tuned.
Initially allow them to set up supermarkets only in metros. Make costs of entry high and according to specific norms and regulations so that the retailer cannot immediately indulge in predatory pricing.
In order to address the dislocation issue, it becomes imperative to develop and improve the manufacturing sector in India. If this sector is given due attention, and allowed to take wings, then it could be a source of great compensation to the displaced workforce from the retail industry.
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