Retail Marketing

Dr Ashok Kumar

Slides are not for circulation 1

 Suggested Textbooks

Retail Management- M. Levy, B. Weitz and Dhruv Grewal

9th Edn, TMH Publication

Retail beyond Detail : The great Indian retailing business

by Gibson. G Vedamani

Slides are not for circulation 2

Gradual shift to Modern Retailing Super Market

DC

Manufacturer

Distribution management
Sourcing management
A Convenience
Store
Manufacturer DC
B Corporate
Retail
Manufacturer Organization Department
C store
DC
Manufacturer
D

Inbound Out bound DC Store Hyper mart

logistics logistics Management

Slides are not for circulation 3

 SUMMARY
10.2% of the total retail
VALUE
market of India BRICK AND
RETAIL
MORTAR STORE
ORGANIZED/
$820 Bn MODERN TRADE
CLICK AND LIFE STYLE
RETAIL
MORTAR
RETAIL SECTOR

UNORGANIZED/ NEIGHBORHOOD
KIRANA RETAIL STORES
Source : Technopak

12 million Kirana stores accounting for 90% of the FMCG sales . Source : Market research agency Nielsen.
Slides are not for circulation 4
 Modern Retail Business model can be broadly divided into :

Brick & Mortar Click & Mortar

Cash
MBRT SBRT
& Carry

1. Value retailing : Typically a low margin-high volume business (primarily food & grocery
category )

2. Lifestyle retailing, a high margin-low volume business (apparel, footwear, electronic

goods furniture etc). The sector is further divided into various categories, depending on
the types of products offered.
1. Why F&G retail is tough nut to crack ??
High operating cost , low margin, challenge to build last mile linkage followed by high
shrinkage percentage pose a challenge in managing the value retail segment .
CLICK AND MORTAR (ONLINE ) RETAIL MODEL :MARKET PLACE MODEL

ONLINE RETAILER

for internal use only . Not for circulation 6

 INVENTORY (STOCK & SELL) MODEL
(FDI is not permitted in inventory based model of e-commerce.)

Reverse
Logistics
ONLINE
RETAILER
Online retail is
incomplete
without an
adequate
return policy. COD

for internal use only . Not for circulation 7

Drivers for Organized Retail growth in India
 FDI POLICY FAVOURING RETAIL SECTOR

• Under Ministry of commerce and industry , Department of Industrial Policy

and Promotion ( DIPP) made the following policy changes w.r.t to FDI in retail
sector.

• 51% OWNERSHIP THROUGH FDI IS ALLOWED IN MULTI BRAND RETAIL TRADE

• 100% OWNERSHIP THROUGH FDI IS ALLOWED IN SINGLE BRAND RETAIL TRADE

• 100% OWNERSHIP THROUGH FDI IS ALLOWED IN CASH AND CARRY TRADING

• 100% OWNERSHIP THROUGH FDI IS ALLOWED IN ONLINE RETAIL TO OPERATE AS

MARKET PLACE .
 Foreign Direct Investment Policy
The FDI policy in the multi brand retail sector are subject to the following
conditions:

 • Every state has the option to accept or reject the implementation of

this policy.

 They will have to mandatorily source 30% of their goods from small
and medium-sized Indian suppliers. ( Policy is amended for SBRT )

 • Multi-brand retailers must have a minimum investment of US$100

million with at least half of the amount invested in back end
infrastructure.

 Retailers can only set up in cities with a population of more than 1

million (total of 53 cities in India) provided they have the approval from
the respective state governments.
for internal use only . Not for circulation 10
 Types of Franchisee agreement

1.Business Format franchisee : Exclusive right to follow the

business model of the franchisor in a particular region/ Area.

2.Product franchise : Exclusive right to sell and promote the

products of franchisor .

3.Manufacturing franchisee : Right to produce and sell goods using

name and trade mark.

Slides are not for circulation 11

Costs Involved With Buying a Franchise

• Initial Franchise Fee

• The initial fee varies depending on the franchisor.
• Capital Requirements
• The costs vary but may include the cost of buying real estate, the cost of putting up a
building, the purchase of inventory, and the cost of obtaining a business license.
• Continuing Royalty Payment
• Is usually > 10 - 15% of monthly gross income.

15-12
• Advertising Fees
• Franchisees are often required to pay into a national or regional
advertising fund.

• Other Fees
• Other fees may be charged for various activities, including:
• Training additional staff.
• Providing management expertise when needed.
• Providing computer assistance.
• Providing a host of other items or support services.

15-13
 Important clauses in Franchise agreement
• Territory Limitations clause
• Advertising fee
• Terms of Renewal
• Non-Competition Covenant and Similar Restrictions

• Protection of Proprietary Information, Marks and Other Intellectual Property

: Franchisor is grants only a temporary license to the franchisee. Protection
of confidential and trade-secret information by stating the limitations that
are placed on the franchisee’s right to use such information.
• Indemnification clause
All franchisee agreements will contain an indemnification covenant, which
means that the franchisee will reimburse the franchisor for any losses it suffers
as a result of some negligent act or wrongdoing of the franchisee.
Slides are not for circulation 14
 Is digitization in retail responsible for apocalypse of brick-and-mortar
retail ?
Retailers are employing technologies like AI, Internet of Things (IoT), virtual
reality (VR) and augmented reality (AR) , cognitive computing( emotional
intelligence) to give shoppers experiences that engage, inform and entertain.

• Retailers are shifting focus from products to experiences, and blending the
physical and digital to offer personalized shopping experiences( convenience
communal experience , curated assortments and interactive and
immersive experience ) building shopper loyalty and advocacy.
• Shopping experiences demand more sensory, information-rich, convenient
and personalized.
Traditional retailers who have been slow to react, has experienced an alarming
and nearly unprecedented rate of store closures and financial losses.
Slides are not for circulation 15
Experience type 1: Convenience
A number of retailers have leveraged digital technologies like virtual assistants , smart
sensors, facial recognition and machine learning, to remove checkout delays, make it
easier to find items in the store, reduce the wait times to return items or pick up online
orders, and provide fast and flexible fulfillment, including same- and next-day delivery.

Virtual assistant identifies preference patterns from images and videos “ browsed and
liked” by online shoppers .

Amazon’s Echo Look device, incorporates a camera into Alexa’s virtual assistant function
and recommends styles based on the user’s wardrobe and body shape, combining
machine learning and AI.

“Buy online and pick up in store” ( BOPIS) or buy in store and get delivered through
online, kiosks subscription services, curbside pickup service and auto-replenishment.
Slides are not for circulation 16
Experience type 2: Communal experience
The focus on communal experiences is to reposition retail destinations as centers of
local culture. Community retail seeks to turn physical stores into destinations for
gatherings of loyal consumers who orient themselves to particular causes, affinities,
interest groups or cultural distinctions. (e.g., urban hipsters , Young fashion freak , elderly
class )
Experience type 3: Curated
The future of retail will not be about having a large variety of products, rather, it will
involve winning over shopper experience with thoughtful curation of products .
1. Retailer curate an assortment of products for one specific type of customer class
around a particular lifestyle activity spanning multiple product categories .( Eg. Most
popular tea types in India are Assam Tea , Nilgiri tea, Darjeeling tea and Kangra tea,
similarly local Coorg coffee from Karnataka , and Kerala and TN ).

2. AI-enabled advanced analytics and mobile technology to make personalized product

recommendations based on the consumer’s predefined preferences, past purchase
behavior and, in some cases, even Slides
thearecontent of their published Pinterest boards.17
not for circulation
Experience type 4: Immersive & interactive

Immersive experiences relate to a broad range of consumer-centric

experiences intended to surprise, delight and wow the shopper. These
experiences range from immersive( 3 D and interactive ) displays,
leveraging AR and VR, to personalized content, pop-up shops and
specialized amenities, all offered in a unique environment emphasizing
newness and spot-on service.

Eg. Lenskart’s personal styling with no inventory; Smart mirror in Zara

fashion retail having augmented reality experience, where shoppers can
flaunt with high end fashion wear and lingerie's, engage their mobile
phones to see models wearing selected fashions .

Slides are not for circulation 18

AR layers images over the consumer’s immediate surroundings, such as projecting a new
outfit on an image of the shopper. Eg Smart Mirror in a store.

AR applications in Retail : Ikea store

providing a trial of furniture the AR
way in your bed room .

Virtual changing rooms in Gap stores.

Slides are not for circulation 19

“Aldo”, a Shoe and accessory retail chain enhances the consumer
experience by creating a true omni channel environment, each time a
shopper enters a store. Using IoT and mobile technology, Aldo created an
interactive and integrated store touch point that links to a mobile app.
This new consumer experience includes product wish lists, high-resolution
product images and descriptions, and social media sharing.By offering an
adaptive consumer experience, Aldo is providing high levels of engagement
to shoppers, resulting in an increase in sales of 20% YoY.

Raley’s Supermarkets use guided-selling techniques to nudge shopper to

smarter and healthier product choices. It incentivizes shopper to select
healthy and local products by offering additional reward points on these
purchased items, which can then be turned into savings on future purchases.

Slides are not for circulation 20

Retail business strategies driving sustainability and scalability
• Omni channel strategy

• Private label strategy

• Hyper local strategy :

• Co creation and partnership strategy

• Stock control and optimization strategy

• Sales return , store credit and e wallet strategy

Slides are not for circulation 21
 Immense scope in the digital economy for traditional retailers if they shift
focus from products to experiences, and blend the physical and digital to
offer personalized shopping experiences.

 Omni channel strategy : Retailers leverage a single view of the shopper

with tight integration & analysis of shopper’s transaction data across
all channel to deliver unified experience .
Customer enjoy the same experience of the retail brand irrespective of
the channel medium.

 Omni channel removes the boundaries between multi channels such as

online, social, mobile and physical to create a unified shopping
experience. The stress is on enforcing a consistent brand image to
create a sense of familiarity with the customer and forge a stronger
bond. Slides are not for circulation 22
Omni Channel Strategy : Retailers leverage a single view of the shopper by integrating
and analyzing customer transaction data from online , Mobile and physical store and
social media platform for building unified customer experience.

Multi channel Retailing

Identifying privilege customers and offering brand or Product variety ,

discount , payment option, sales return, special offers like
credit Point, voucher redemption etc.
23
for internal use only . Not for circulation 24
• Costco.com captures a single customer view of all the transactions done ,
complete history of all the products customer bought, services like sales
return, payment options ( EMI, pay later ) availed by each individual
customer . Costco.com is known for refunding in full - including shipping and
handling fees - and will be credited to the credit card/member wallet ,
irrespective of the channel from which he bought the products. . You won’t be
charged for the return shipping.
• Omni channel experience : Customer enjoy the same experience of the store
brand “Kirkland Signature brand , across the category like clothing and luggage,
household, grocery, health and beauty etc in buying , fulfilment and customer
service process irrespective of the channel medium . Members justifies the
membership fee of $120/ pa .
• omni channel helps to maintain complete history of when the customer last
visited the store and track the multiple visits and buy analysis across all the
channel, the type of products bought and returned in the past.
for internal use only . Not for circulation 25
Warehouse club retailer Costco leverages its large and popular store -brands business
same like Kroger and Walmart which too have cultivated their own private-label brands.

Costco generated $39bn worth of revenue with Kirkland Signature in 2017 , which is
roughly third of total sales, and up 11% from PY sales of of $35 billion.

Low margin & high volume to high margin high volume at Costco for Kirkland
Signature
Costco’s internally curated selection of packaged foods and other products fill inventory
voids, but also boost the bottom line, where the profit margins on third-party-branded
foods can be on the order of 2.5 to 3%, gross margins, store brands help to reach
between 25% and 30%.
U.S. shoppers visit the retailer more often to purchase a private-label goods according yo
core sight research data.
Costco also offered deep discount in luxury brands like Omega watches and Tiffany (
luxury jewelery and gift items .
Slides are not for circulation 26
 Managing large and /or complex transactional
data sets is a challenge.
Challenges like CAPTURE, STORAGE ,ANALYSIS , DATA
CURATION , SEARCH ,SHARING , TRANSFER ,
VISUALIZATION, QUERING REALTIME UPDATE AND
SAFETY AND SECURITY .

. “BIG DATA ANALYTIC TOOLS” are used for

predictive and behavior analytics

Artificial intelligence tools and Machine learning algorithm tools are used to develop data
modeling and predictive analysis.

AI tools use this information to suggest good recommendations and offer personalized
rewards like discounts, loyalty points, up sell or cross sell the products etc., for the current
shopping needs to the shopper.
Slides are not for circulation 27
 Functional Building Blocks for
Creating an Omni-Channel Retail Experience –
Single View of Product : common Content Management System across
channels. Technologies like QR codes, store kiosks and mobile apps to provide
a consistent digital experience.

Enterprise Inventory Visibility: Centralized database and common view of

inventory across channels. This will enable internal fulfillment operations and
support the “endless aisle”. ( Supplier stock , Fulfiment center stocks ,
collaborated partner stock)

In-store Mobility: Mobile applications of the retailers should provide social

engagement, competitive pricing information, product reviews and
recommendations to customers.
They should also provide features like ‘Click to Chat’ or ‘Click to Call’ , click to
order which will allow customers to get additional support and expedite buying
decisions. for internal use only . Not for circulation 28
Personalized Engagement : A CRM system which provides a common view of
the customers, irrespective of the channel of engagement. Individual customer’s
total spend, frequency of transaction across all channel, last visited date , reward
earned , preferred mode of payment, amount of sales return and RFM score of
the customer.
Suggested loyalty programs and suggestive selling recommendations based on
the above transaction data.

Seamless Channel Commerce: Systems for Unified Order Entry, Common

Basket Management and Order Fulfillment system . This will provide the
transaction fluidity between channels which customers expect from today’s
retailers. Customer will get a single view of all orders placed on the retailer and
fulfilment schedule committed. The integration of Order Management and Order
Fulfillment systems between channels will enable scenarios like 'buy
online/mobile - pick up in store'.
for internal use only . Not for circulation 29
 Technology architecture for Omni channel system

Expose enterprise
functionality through
Application Programming
Interfaces (APIs) so that they
can be accessed through
mobile applications on
the customers’ smart
devices

Enterprise Service Bus

to host various business
services and Processes
High volume transaction
processing tools and
system like data grids to
support real-time
interactions involving
for internal use only . Not for circulation 30
heavy data movement
 Co creation and leveraging partnership :
Concurrent engineering model
Co creation and leveraging partnership strategy is a model
adopted from “ZARA” Inditex. “Zara used the strategy effectively
to create its own fashion design and rolled out in the market
every 21 days.
The strategy helps in customizing and expansion of the category,
an efficient fulfillment support and developing inventory
support by eliminating bull run( input material cost increase)
and mitigating bullwhip effect.
for internal use only . Not for circulation 31
 C.K Prahalad and Venkat Ramaswamy popularized the concept in their
article “ Co Opting Customer Competence “ published in HBR -2000, Co
creation and leveraging partnership strategy : Co-creation is a economic
strategy that brings different parties together (for instance, a company and
a group of stake holders ), in order to jointly produce a mutually valued
product.
Benefits
• Reduced time and speed to market
• Saving on product development cost
• Product localization and innovation
• Faster and cost effective private label ( store brand ) for retailer
• Proven product quality

Slides are not for circulation 32

 This is a process of converting
design to raw materials into
finished products involves :

Product Design, Fabric

Selection and Inspection,
Patternmaking, Grading,
Marking, Spreading, Cutting,
Bundling, Sewing, Pressing or
Folding, Finishing and Detailing,
Dyeing and Washing, QC etc.

Slides are not for circulation 33

 Artisan
Quality
In house team
check

Distribution
center
Fabric
supplier
Designers Clusters
Weavers

Captive looms in Bhagalpur , Varanasi, Kanchpuram

Slides are not for circulation 34
The bullwhip effect is a distribution channel phenomenon in which in
accurate forecasts yield supply chain inefficiencies. It refers to increasing
swings in inventory in response to shifts in customer demand as one moves
further up the supply chain.

Slides are not for circulation 35

 Mitigating Bullwhip effect :

 Collaborative Planning, Forecasting and Replenishment (CPFR), is a

concept that aims to engineer and enhance end to end distribution chain
integration by supporting and assisting joint practices. It aims to have
standardized processes, technologies and supporting standards for
upstream and down stream exchange of information between trading
partners .

 CPFR seeks cooperative management of inventory through joint visibility

and replenishment of products throughout the chain.

Slides are not for circulation 36

 CPFR initiative participants Collaborative Planning and forecasting process

Supplier

Key business processes are • Stock in hand • Capacity

• Fill rate • Order lead time
integrated using ERP for joint • Next cycle demand • Ready stock
business planning . • Price • MOQ
1. Sales forecast process • Product specification • Price
change
2. Category management process
3. Sourcing process
Slides are not for circulation 37
4. DC operation process
CPFR Benefit

• Effective inventory
management
• Improved replenishment
system
• Increased customer
satisfaction level
• Less working capital tied up
to inventory
• Increased profitability

Source: AMR Research 2015

Slides are not for circulation 38

 Hyper Local strategy : Providing an enhanced Webstore or in-store
experience with personalized recommendations, offers, and product
support according to age, gender, location, and behavior of customers.

 Retailers use hyper-personalization models based on behavioral data,

brands performance with the help of artificial intelligence and machine
learning solutions for enhancing in-store customer experience and
boosts sales.
 Customer experience and loyalty programs using artificial intelligence
tools for innovative value-added services, like exclusive and personalized
shopping deals , product offers according to age group, gender and
product and brand preferences , happy hours buying etc.
Slides are not for circulation 39
 How AI is transforming the retail industry for better business outcomes.

1.AI introduces іn-ѕtоrе gеѕturе wаllѕ that make shopping less about ѕеаrсhing
and more about finding. With gеѕturе rесоgnіtіоn tool , AI algorithm an сарturе
and іntеrрrеt humаn gеѕturеѕ аѕ соmmаndѕ. Shорреrѕ саn fіnd thе реrfесt
products , Instead оf ѕhіftіng thrоugh rасkѕ оf сlоthеѕ іn thе ѕtоrе .

2. Dіgіtаl саtаlоg thаt еnаblеs ѕhорреrѕ tо mаkе mоrе іnfоrmеd, реrѕоnаlіzеd

decisions. It can make product recommendations.

3. Shopping with vіrtuаl mіrrоrѕ: Try on” different clothing items without getting
undressed and dressed numerous times.

Slides are not for circulation 40

4. Chats with chatbots: With Messaging apps retailers can have оnе-
оn-оnе conversations with сuѕtоmеrѕ іn real-time, helping them to
solve problems, fіnd рrоduсtѕ.

5.Video anаlуtісѕ tool boosts customer behavior insights in physical

store. : Dаtа gеnеrаtеd bу the tool hеlрѕ dеtеrmіnе customers’
рrоduсt exposure level, engagement, аnd navigational rоutе
thrоughоut thе ѕtоrе. Thіѕ data is used to improve ѕtоrе layout to
drіvе maximum еxроѕurе and increase the length оf customers’ visits.

6. Rоbоtѕ to serve customers : Whіlе rоbоtѕ are uѕеd in retail

dіѕtrіbutіоn centers fоr pick, расk, аnd ѕhір operations , they are now
used in store floors for іntеrасtіng with сuѕtоmеrѕ and find the
products easily.
Slides are not for circulation 41
Hyper local strategy in retail to develop store brands, in store promotion and
personalized customer service
• AI tools analyze already-collected data at point of sale to target marketing campaigns or
product advertisements to specific customers to reactivate the less frequent or lost
customers and bring them back to web stores, thus maximizing their cart value.

• AI solutions in retail store helps to find when the customer had last visited the store and
track the multiple visits and the products bought in the past. Accordingly , AI tools use
this information to suggest good recommendations and offer personalized rewards like
discounts, loyalty points, etc., for the current shopping needs to the shopper through its
mobile retail App.

• Augmented reality /Virtual reality solutions like smart mirrors and 3 D walk-through
models for explaining product look and functions has enriched the customer experience
with the web store.

Slides are not for circulation 42

• AI- enabled kiosks and digital signage units can recognize shoppers and adapt the
in-store product displays. In addition, it can study customer behavior and help in
recommending products based on the shoppers’ needs, preferences, and fit.

• During PoS checkout or interaction with salespersons, AI-powered devices like voice-
enabled cameras can recognize and interpret facial, biometric and audible cues and
capturing shoppers’ in-the-moment emotions, reactions and deliver appropriate
products, recommendations or support. This ensures high retail engagement .

• Amazon Alexa, Apple’s Siri, and Google Assistant are using machine learning
algorithms and models. These voice assistants are used in retail stores to assist
customers at the shelves, trial rooms, and self-checkouts for additional
production/brand information , recommendation etc. Voice assistants can have one-
to-one communication with customers to improve their personal shopping
experience.
Slides are not for circulation 43
 Category selection strategy
More than 70 percent of the retailer’s operating budget is used for sourcing category .
Contribution margin % = CM ÷ net sales
Operating margin % = EBIT ÷ net sales

Stocking all products demand high storage space and operating cost (carrying cost) .
It also results in excess EOSS due to high percentage of unsold inventory .
Analyze the performance of the category
( Fig in lacs) INR Category - A Category – B
Revenue from 500, 00000 500,00000
operation
EBIT ( Operating 35, 00000 25,00000
profit )
DOI or DSI 45 days 20 days
Capital 100,00000
Slides are not for circulation 40,00000 44
Check EBIT % and ROCE

If you consider operating profit alone , then category -A looks like the better
investment at 7% return on sales as compared to category –B at 5%; however,
when compared with operating efficiency of the business , with such a large DOI ,
category A needs more capital 6000000 more than category - B at a given time.

In other words , category - B needs less capital and would result in a higher
ROCE.
DOI = ( Av inventory ÷ COGS ) x period
( 3000000 / 8000000) x 150 days
56 days
Slides are not for circulation 45
IKEA - a volume retailer in the global market owns 9500 product
varieties.

IKEA’s category range in India spans from Kitchenware(plastic spoons

worth Rs 15 to disposable organic cutlery , exclusive range of products
like waterford crystal glassware and Bourbon decanter , very high value
navy-blue suede couches costing over Rs1 lakh.

How to select the category :

1. Identify sales drivers , value drivers and stock drivers in your category.
 Stock planning and control is all about efficient rotation of capital.

Analyze the category on pareto curve. 60-70% of business value

typically come from about 30% category /assortments / products . ( 80-
20 Pareto rule).
20% products account for 75 % sales, 30% products account for 15 %
sales and balance 50% products account only for 10 % sales .
Most of the products in the 30% category are very price competitive with
low margins. But the retailers rely on fast rotations of stock ( high volume
sales ) in this selection to earn their return on capital. This category is
popularly known as sales drivers .

Retailers need to achieve a balance between the sales drivers and rest
of the category to get the best of both the worlds across all crests and
troughs in the year. Slides are not for circulation 47
 Category selection

Tail
Stock drivers
Belly
Tail assortment stock is held in larger
value
Head drivers variety to maximize the footfall and
improve margin. It can be non
Retailers standard and rare stocks .
own brand
Sales
Drivers,
These are
popular brands

Products

Retailers need to strike a balance between fast selling low margin products and low
selling high margin products.
 Analyzing Retail Sales data on Pareto curve
Sales Assortment Margin Operating Stock Risk Stock turn Stock
cost type
75 % 20 % Sales Low Low Low /moderate High Outright
Driver stock
15 % 30 % Value High Moderate Low Moderate VM stock
driver
10 % 50 % Stock Low / High High Low Outright
driver moderate Stock

Retailers need to strike a balance between fast selling low margin products and
low selling high margin products to achieve efficient utilization of employed capital .

Unless a retailer strike this balance, GMROI and ROCE is always be an issue in retail.

Slides are not for circulation 49

 Why should a retailer even operate in a tail category?
 A tail assortment is your pipeline for the future head categories. Retailers
want to carry the tail selection in order to keep a check on how the
selection will grow and to get an idea about the customers’ preferences
(for other than head selection).

 To drive more traffic or footfalls to the store. Head selection is offered by

every other retailer because , usually, the head selection is very strong in
distribution and every retailer wants to carry them and, therefore, carrying
the same head selection as every other retailer doesn’t give any unique
advantage and that is where tail selection can drive more traffic and a
unique advantage to the store.
Slides are not for circulation 50
If the head selection is rotated 20 times in a year and is achieving a gross
return of 15%, then the retailer should aim for the same or more return even
from the tail with fewer inventory rotations . In a cut throat competitive
environment , focusing on value and stock drivers will provide cushion to the
retailers .
25% sales from 80% assortment doesn’t mean 80% inventory. A retailer
always carries inventory in proportion to the sales .

Slides are not for circulation 51

 Retail positioning on the basis of category Category Role
Wide
 Destination Category
Category

 Anchor category

 Routine category

Narrow  Seasonal category

Shallow Deep
Assortment
 Convenience category

Slides are not for circulation 52

 GMROI
= GM % X Inventory
Turn over

GMROF

GMROL

Gross margin% = { (Net Sales – Cost of

Goods ) ÷ Total sales } x 100 Slides are not for circulation 53
1. Gross margin% = { (Net Sales – Cost of Goods ) ÷ Total sales } x 100
For example, consider the sales drivers products yields season’s net sale of
Rs 13 Mn
2. COGS = Beginning Inventory + Total Purchase - Ending Inventory
COGS = 8.2 Mn
The Gross Margin% = 37 %

Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2

If Average Inventory @ retail price = 2.5 Mn
Inventory Turnover = COGS / Average Inventory
Inventory turn over = 3.28
GMROII = .37 x 3.28 = 1.21
Retailer is getting 1.21 in gross margin back for every Re 1.00 invested in
inventory in this category for the season.
 How a retailer uses the concept of GMROI?
To compare various category/department and decide where to make more
investments. Caution: !! Do not get carried by topline. !!
Dept. NET SALES category GM% AV
INVENTORY@
PRICE

A 315400 FFV 46 102400

B 220100 Home furnishing 41 53000

C 210500 Casual Footwear 32 86100

D 186500 Cosmetics 48 33700

E 450125 Grocery 29 21500

Category/dept. GMROI Rank Net Sales

FFV/Dept. A 1.41 4 315400

Home fur/ Dept. B 1.7 3 220100

Casual footwear /Dept .C .78 5 210500

Cosmetics/ Dept D 2.65 2 186500

Grocery/ Dept. E 6.07 1 450125

GMROI = GM% x Net sales / Average Inventory

Slides are not for circulation 56

How inventory Impacts your GMROI.

PROFITS
 Outright inventory versus consignment inventory

A retailer purchases the goods by making complete payment for

the merchandise in the beginning itself. He specifically selects
only those goods, which he believes can be retailed within a
particular time frame, and attracts huge customer response
without leaving anything to chance.

Consignment inventory is a no risk inventory.

 Inventory Ageing Report
Sales drivers

a÷ b
a b

Age of inventory
Inventory Liquidation routes.
 Store Layout , Product location & Adjacencies
GMROF helps to analyze the gross margin generated from the product by
virtue of being in a particular space assigned . GMROF = GM% x sales/Sqft
Types of Store Layout:
1. Grid / Rack 2. Race track 3. Free Form

Selling areas: (2/3 of the total available space), where

merchandise is displayed and customers interact with sales
personnel.

Sales support areas: Devoted to customer services,

merchandise receiving and distribution, management offices
and staff activities.
 Store layout should address:

Space Amount of Shelf space

Allocation sqft. Availability

Exposure ,
mood & To create curiosity and
Customer eyeball Engagement with products.
Flow contact
Adjacency & Neighbor category
Right Home electronics &
Attachment
Neighbors Home décor
 SPACE OPTIMIZATION INSIDE THE STORE: GMROF

Hyper Market Average Store

Chain Size ( Sq ft)
Big Bazaar 40000- 50000
Reliance Mart 30000- 40000
More Megastore 50000- 55000
SPAR 40000-50000
Star Bazaar 50000-55000
Hyper city 50000-55000
D- Mart 40000-50000

Slides are not for circulation 63

Right balance between product Location, store Layout and product
Adjacencies .

GMROF helps to understand

the interdependent
relationship between the
above three parameters.

GMROF = GM% x Sales/SQft

Slides are not for circulation 64

 SPACE OPTIMIZATION INSIDE THE STORE: GROSS MARGIN RETURN ON FLOOR SPACE

GMROF = GROSS MARGIN % x Net Sales

Selling feet
PRODUCT A B C D

GM% 12 20 35 50
SPACE allocated 500 700 500 1200
Bright
spot Location Aisle cross Exit spot End of Aisle Entrance Dark spot
Net Sales 7000 4000 3500 3000
(14) ( 5.71) (7) (2.5)
GMROF 1.68 1.14 2.45 1.25
Rank 2 4 1 3

This model will create optimal space allocation. Low margin product is
generating higher GMROF compared to those having high margin . ( B& D) It
helps to decide good store layout when analyzed along with right adjacencies
and customer flow path .
for internal use only . Not for circulation 65