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Unit-10-Project Evaluation in Retail Stores Structure: 10.1 Introduction Objectives 10.2 Parameters Affecting Retail Management 10.3 Factors Affecting the Retail Pricing Strategy 10.4 Retail Price Index 10.5 Summary 10.6 Glossary 10.7 Terminal Questions 10.8 Answers 10.9 Case-let 10.1 Introduction In the previous unit, you came across various stages that are associated with the retail project execution. You are also familiar with the process of scheduling and estimating a project in retail stores. This unit familiarises you with the concept of various parameters that affect retail management and also Retail Price Index. The unit also explains the importance of pricing in retailing and the various pricing strategies used by retailers all around the world. As discussed in the earlier units, retailing consists of those business activities involved in the sale of goods and services to consumers for their personal, family, or household use, which includes selling anything to the final consumer from cars to apparels to meals in a restaurant. Retailing is the last stage in the distribution process. The retail Industry, which can be considered as one of the fastest changing and vibrant industries in the world, has contributed largely to the economic growth of many countries. There are lots of opportunities in retailing today one can start a new retail business or work for an existing one or become a franchisee of an established chain of stores. This unit describes the parameters affecting the pricing strategies and the meaning of retail price index. It also explains about how the emergence of youth in India is contributing to the variations in the market. Objectives: After studying this unit, you should be able to: explain the various parameters that affect Retail Management analyse the factors that affect the Retail Pricing Strategy explain Retail Price Index
10.2 Parameters Affecting Retail Management Before knowing the parameters affecting the retail management, it is very essential to know about the retailing process and retail management. Retailing is a process, which involves a direct interface with the customer and the coordination of business activities from the design stage of a product to its delivery and post-delivery service. Generally, retail businesses are classified into several types, depending on their size, shape, product line, amount of service they offer and price involved etc. Some of them are specialty stores, supermarket/malls, factory outlets, franchises, chain stores, discount stores, lifestyle and personal products, furnishing and house hold appliances, etc. Retail Management involves managing the process of bringing the finished product from the manufacturer to the ultimate end-user, through a series of stages. Retailing is the last stage in this process. Evaluating this process in stores is necessary in order to understand the products which have performed well and which have not performed as per the target. Project Evaluation in retail stores is a process of collecting, recording and organising the information about retailing, including immediate and longer-term project outcomes (changes in behaviour, practice or policy resulting from the project in a retail store). Several parameters affect the progress of retail management, like population demographics, lifestyles, varying income, changes in consumption patterns. Parameters Affecting Retail Management in India: The Indian retail industry is the fifth largest in the world. Comprising both organised and unorganised sectors, the Indian retail industry is one of the fastest growing industries in India, especially over the last few years. Until recently, the retail industry in India was mostly unorganised. However, with the change in tastes and preferences of the consumers, the industry is getting more popular these days and getting organised as well. With growing market demand, the industry is expected to grow at a pace of 25-30% annually. The Indian retail industry is expected to grow from Rs. 35,000 Crore in 2004-05 to Rs. 109,000 Crore by the end of the year 2010. The most important parameters affecting retail management in India include: Population demographics. Varying income and lifestyles of people. Differences in the tastes and preferences between rural and urban population. Changes in consumption patterns. Emergence of youth in India. Let us now discuss each of these parameters in detail: Population Demographics: Demographics or demographic data are the characteristics of a human population as used in government, marketing or opinion research. They are the objective, quantifiable, easily identifiable, and measurable population data. Demographics segmentation is based on the division of retail market into groups depending on variables such as age, gender, family size, income, occupation, education, religion, race and nationality.
As explained, the demographic segmentation variables are among the most popular base for segmentation of customer groups. This is because the behaviour of customers is closely linked to variables such as income and age. Also, for practical reasons, there is always more data available to help with the demographic segmentation process. The demographics of India are remarkably diverse. India is the second most populous country in the world, with over 1.18 billion people (estimate for April, 2010), which is more than a sixth of the worlds population. Further complexity is lent by the great variation that occurs across this population on social parameters such as income and education. The main demographic segmentation variables are summarised below: Consumer needs mostly change with the age, although people may still wish to consume the same type of product. So Marketers customise the design, package and promote the products differently to meet the needs of different age groups. Good examples include the marketing of toothpaste (customising the branding of toothpaste for children and adults) and toys (with different age-based segments). Changes in population demographics have many potential consequences for a retail organisation. As the total population varies, the demand for products and services also changes. For example, [1]the decline in the birth rate and improvement in health care have contributed to a decrease in mortality rate and hence increase in the population in the United States. This increase in population would naturally increase the demand for various products and services. In India, many firms that traditionally marketed their products to the younger population are developing product lines that appeal to a slightly older age group. For example, clothing from Levi Strauss & Co. was traditionally popular among young adults. While its popularity in this market has waned, the firm has been able to develop a strong following in the adult market with its Dockers label. More and more people in India are getting knowledgeable and cosmopolitan; they are now more aware of trends in tastes, styles and goods and services that are available. They are now more sophisticated and selfassured that they would not compromise and settle down for something less than what they want. Due to the trend towards working women, the lifestyles of men and women are changing. Women are taking up highly responsible jobs and hence are getting more confident and are able to take shopping decisions on their own, while men now take care of children, shop for food, and do laundry and so on. Hence, retailers need not target only women for household items or only men for electronic goods and cars. Varying income and lifestyles of people: Income segmentation is another popular basis for segmentation. Many companies target affluent consumers with luxury goods and convenience services. Good examples include [2]Coutts bank; Moet & Chandon champagne and Elegant Resorts an up-market travel company. By contrast, many companies focus on marketing products that appeal directly to consumers with relatively low incomes. In todays globally competitive environment, brands are specifically developed and positioned within particular income segments in order to maximise turnover. Products and services are also aimed at different Lifecycle Segments. Lifestyle of People or Consumer lifestyle is an important parameter which also affects the retail management. They are based on social and psychological factors and are influenced by demographics. As with the demographics, a retailer should first have some knowledge of consumer lifestyle concepts and then determine the lifestyle attributes of their own target market. Some of the social and psychological factors help in identifying and understanding the consumer lifestyles. Cultures, social class, reference groups, the family life cycle are some of the social factors which help the retailer to know the consumer better. Similarly, psychological factors like personality, class consciousness, attitudes (opinions) and perceived risk help the retailer to know the consumer better.
Differences between the tastes and preferences of rural and urban population: Rural-urban divide is the difference which exists between the rural and urban areas. In rural markets, the brand loyalty is always the highest. Once the rural and urban divide has vanished, the marketing for a product becomes easier and more demanding. In India, this divide is seen more often, if one can penetrate rural India, then they can stay there for long. To sell more in rural India, one must know what it is about, how it feels and behaves. Here the need is always in smaller quantities and is needed across all price points. They want the best quality at the lowest price, which is always difficult to meet. Changes in Consumption Patterns: Asian markets are witnessing a shift in trend from traditional retailing to organised retailing driven by the liberalisation on Foreign Direct Investments. For example, in China there was a drastic structural development after FDI was permitted in retailing. India has entered a stage of positive economic development which requires liberalisations of the retail market to gain a significant enhancement. The recent years have witnessed rapid transformation and vigorous profits in Indian retail stores across various categories. This can be contemplated as a result of the changing attitude of Indian consumers and their overwhelming acceptance to modern retail formats. These changes are also seen throughout the world. Consumption patterns in India: Retail is the new buzzword in India. The Indian consumption patterns are slowly merging with global norms. The Indian consumer is now spending more on consumer durables, apparel, entertainment, vacations and lifestyle related activities. Entertainment, clothing and restaurant dining are categories that have been witnessing a maximum rise in consumer spending since 2002. India is on the radar screen in the retail world, and global retailers are seeking entry into the Indian retail market. The Indian retail market is considered to be the second largest in the world in terms of growth potential. One of the key reasons for the increased consumption is the impressive growth of the middle class. [3]Around 70 per cent of the total households in India reside in the rural areas. The total number of rural household is expected to rise from 135 million in 2001-02 to 153 million in 2009-10. This presents the largest potential market in the world. According to the study conducted by NCEAR, the number of `lower middle income group in rural areas is almost double as compared to the urban areas, having a large consuming class with 41% of the Indian middle class and 58% of the total disposable income. An increase in the education level and media exposure has led to significant changes in the consumption pattern of rural India. The increase in purchasing power and exposure to organised retail formats has redefined the consumption patterns in India, which has resulted in emergence of retail projects in smaller towns and cities. Since the past four to five months, inflation has been settling down. But it is a fact that inflation is going to remain. This is not only due to the mismatch in the supply-demand scenario, but also due to the rapid change in the consumption pattern of consumers. The consumption pattern is changing rapidly in India, particularly in rural areas. Even in food consumption, the customers are upgrading very rapidly. We are noticing the changes in eating patterns in every three to six months. People are getting more exposed to various foods and their awareness levels are also changing. Aspiration levels and consumption habits are changing.
Consumers are looking for fast food (like pizzas and burgers) and also for healthy products (with less cooking oil). As an industry, if the retailers do not prepare and gear up for such kind of changes, they will have to lose business. In the next four years, retailers will have to face a different set of customers with different needs. They need to be on their toes to understand these changes, introduce new products and keep up with the needs of the customers. Emergence of the young India: India is one of the youngest nations in the world with more than half the nations population below the age of 25 years. High aspiration levels and optimism of this young India has been a key driver for the change in consumption patterns in India today. It is believed that the next phase of economic development in India will be consumption led. With the sustained and strong rates of economic growth, retail sales is expected to cross USD 400 billion by 2010, turning it into the biggest retail market in the world Today, India is going through an increase in disposable incomes, cheap consumer credit, highly attractive demographics, a booming economy and an increasingly liberal regulatory environment. No wonder, retailers globally are getting serious about India. Though the prize may be great, the road is still a tough one. From understanding local tastes and customising the product offering, to securing access to the right real estate, entrants to the worlds largest untapped retail market face some difficult challenges. Activity 1: Assume that you are a member of a retail management team; evaluate and prepare a report on the sales turnover of a retail store in the fashion industry (hint: the current consumer demographics with respect to the fashion industry) Self Assessment Questions 1. ________ is a process of selling the goods from a fixed location. 2. _________________ in retail stores is a process of collecting, recording and organising the information. 3. ______________ are the characteristics of a human population as used in government, marketing or opinion research. 4. ___________ is a strategy used by many retail firms. 10.3 Factors Affecting the Retail Pricing Strategy Pricing is one of the most important elements of the marketing mix, as it is the factor that generates a turnover for the organisation. The remaining 3ps are the variable costs for the organisation. It costs to produce and design a product; it costs to distribute a product and costs to promote it. Price must support these elements of the mix. Pricing is difficult and must reflect the supply and demand relationship. Pricing a product too high or too low could mean loss of sales for the organisation. In order to arrive at the retail price, one needs to consider the elements like the Cost of Goods, which is the cost of expenses which are involved in the movement of the goods from the manufacturer to the actual store. These expenses may be Fixed or Variable. Fixed costs can be referred to as transparent, which do not vary according to the production amounts. Examples are rent for office space, office equipments insurance, utilities etc. Variable costs are the expenses that vary with the amount of service provided or goods produced. For example, it could the cost paid for a contractor on hourly basis on a specific project, raw materials etc. Pricing strategy is a key feature of any business; it plays a key role in customers perceptions of any business.
Various factors like the target market, store policies, competition and economic conditions should also be taken into consideration while arriving at the price of a product. The important factors which affect the retail pricing strategy of a product are: Business model is considered as a primary factor while arriving at the pricing strategy, as a lot depends upon the business model which the retail company operates with. The business decisions and strategies followed by the retail company directly affect the pricing strategy. Demand for the product and target market is also one of the important factors that define whom is the product meant for and what is the value proposition for the consumer. For example, electronic goods, which are usually high priced products, and are directly linked to quality, and designer clothing, where only a small section of population is willing to pay a premium price. So, it is very essential that the buyer is very clear about the target market for the product and the value proposition they are looking for. The store policies and the image that the retailer wants to create for the store should be taken into account, since the retailers who want to create a prestigious image may opt for a higher range of pricing policy. Competition for the product and the competitors price for a similar product in the market is also an important factor which has to be taken into consideration. If the product is unique and does not have any competition, it can command a premium price; on the other hand if there are similar products available in the market, the prices of such products need to be taken into consideration before fixing the price. The economic conditions play a major role in the pricing policy. For example, during economic slowdown, prices are generally lowered to generate more sales. The demand and supply situation in the market also affects prices. If demand is more than supply, prices can be premium, however, when supply is more than demand, prices have to be economical. The various factors affecting the pricing strategy adopted by a retailer can be illustrated as in Figure 10.1. The Purpose of the business is to maximise the profits and hence, the pricing of the products should be done carefully to ensure that the same can be achieved. Many other pricing objectives help to achieve the targeted sales, to maintain or enhance market share or to meet or prevent competition. Prices should be set at a level that reflects the average industry price, with small adjustments made for unique features of the companys specific products. Firms which adopt this objective must work backwards from the price and fix the costs to enable the desired margin to be delivered. Retail prices need to be adjusted to meet the conditions prevailing in the market.
Figure 10.1: Factors affecting the retail pricing strategy Measuring the performance of this pricing strategy is necessary in order to gain an understanding of the products which have performed well and which have not performed as per the target. Essential Components of a Modern Pricing Strategy Establishing a formal pricing strategy is a long-term commitment to a set of overarching business goals tied to a set of decision-making processes, technology and actions. These attributes characterise todays most effective pricing strategy: Embraces a long-term approach that creates a perception of value in the customers minds. Balances short-term, proactive tactics with long-term margin enhancements in other areas. Contains well thought-out and imbedded mechanisms for measurement, evaluation and course-correction and ultimately delivers the corporations financial goals. There are various pricing strategies followed by retailers the world over. Some of them are: Mark-up Pricing Mark-up price can be calculated by adding a pre-set (often industry standard) profit margin or percentage, to the cost of the merchandise. Here, the retailer needs to be careful to keep the initial mark-up high enough to cover price reductions, discounts, shrinkage and other anticipated expenses, and still achieve a satisfactory profit. Retailers with a varied product selection use different mark-ups on each product line. Vendor Pricing Smaller retail shops usually follow Manufacturer suggested retail price (MSRP) so as to avoid price wars and still maintain a decent profit. Under this policy, retailers are not responsible for product pricing they just
follow the prices suggested by the manufacturers or vendors of products. This way, the retailer will not have to face competition over pricing. The scope for competition would mostly be with respect to customer service and other facilities provided by the retailer. Pricing below competition This simply means pricing products lower than the competitors price. To make this strategy work, the retailer has to negotiate the best prices, reduce the overall costs and follow a marketing strategy that focuses on price discounts. Prestige pricing, or pricing above competition This type of pricing may be considered when location, exclusivity or unique customer service can justify higher prices. Often, retailers who deal with high-quality merchandise that isnt available at any other location are quite successful in pricing their products above competitors. Psychological Pricing Psychological pricing is used when prices are set to a certain level where the consumer perceives the price to be fair. The most common method is using figures that end in 5, 7 or 9. This based on the human psychology that customers tend to round down a price of Rs.9.95 to Rs.9, but usually do not go below Rs. 9. Other Pricing Strategies Keystone pricing is not as prevalent as it used to be. According to this, retailers used to arrive at the selling price by doubling the cost paid for merchandise. Multiple pricing This is a method which involves selling more than one product for one price, such as three items for Rs.100. This is a strategy based on the human tendency to buy larger amounts where there is a discount offer on price. This strategy is especially good for markdown sales or sales events. Discount pricing Discount pricing and price reductions are a natural part of retailing. Discounting can include coupons, rebates, seasonal prices and other promotional markdowns. Products priced below the cost price are referred to as loss leaders. Although retailers make no profit on these discounted items, they use this strategy to draw customers to the store in the hope that they would purchase other items with higher items also It can be concluded that the right product price is the price that the consumer is willing to pay, while providing profit to the retailer. 10.4 Retail Price Index As discussed in the previous section, there will always be fluctuation in the price/cost of a product, depending on the various factors. So it becomes important to measure the changes in the prices of the goods to have an idea about the rate of changes. An inflationary indicator that measures the change in the cost of a fixed basket of retail goods is termed as Retail Price Index (RPI).[4] Retail Price Index (RPI) measures changes in the prices of goods and services bought for household consumption. The RPI takes a large sample of retail goods including food, tobacco, household goods and services, transport fares, motoring costs, clothing, and leisure goods and services. An increase in the index
means that prices have increased on an average (inflation) while a decrease means that prices on the whole have fallen (deflation). The RPI shows the changes in the cost of living. It reflects the movement of prices in a range of goods and services such as food, heating, household, goods, bus fares and petrol. Items considered most important to us, such as housing and food, are given a higher weighting in the overall index, while items such as tobacco, are given a lower weighting. The RPI is inclusive of VAT, and other taxes, and as such can change as a result of changes in taxation levels. Standard is a set of measures (some of which may be mandatory), that contains voluntary guidelines and best practices. It is a base for comparing against which other things can be evaluated. In the United Kingdom, the Retail Prices Index or Retail Price Index (RPI) is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a basket of retail goods and services. RPI was first calculated in July 1947[5]. It was once the principal official measure of inflation. Although it has been superseded in that regard by the Consumer Price Index (CPI), it is still regularly quoted by the UK news media.[6] The RPI is still used by the government as a base for various purposes, such as the indexation of pensions, amounts payable on index-linked securities including index-linked gilts, and social housing rent increases. Many employers also use it as a starting point in wage negotiation. Variations on the RPI include the RPIX, which removes the cost of mortgage interest payments, and the RPIY, which excludes indirect taxes (VAT), and local authority taxes as well as mortgage interest payments. Activity 2: Research on the Web about how the price index for different products changes over a period of time (hint: http://www.bls.gov/cpi/, http://www.britannica.com/EBchecked/topic/475811/priceindex) Self Assessment Questions 5. ________ is one of the most important elements of the marketing mix 6. _________ is a set of measures (some of which may be mandatory), voluntary guidelines and best practices. 7. An inflationary indicator that measures the change in the cost of a fixed basket of retail goods is termed as __________. 8. _______________ is considered as a primary factor while arriving at the pricing strategy. 9. The RPI shows the changes in the cost of living too. (True/False) 10. The economic conditions play a major role in the pricing policy. (True/False) 10.5 Summary Retailing is the last activity in the manufacturing life cycle, which involves a set of business activities that adds value to the products and services sold to the final consumers for their personal, family or household use. Retailers play a major role in the distribution system by helping manufacturers to reach out to the customers and at the same time, offering an array of value added services like breaking bulk, providing assortment, holding inventory and providing information for their customers. Over the recent years, the focus of retail project management is being shifted towards defining, measuring, analysing, monitoring, controlling and improving business processes, in order to achieve and maintain improvements in product and service quality.
The old adage knowledge is power is once again proving true in the arena of retail price optimisation. The historic reliance on human knowledge to set pricing is now giving way to the tried-and-true price optimisation science. This new retail knowledge source is arriving just in time. Broader economic and societal pressures and competition from larger, increasingly sophisticated retailers is forcing retailers of every size to develop and execute strategic, proactive pricing. Pricing strategies are a sometimes-overlooked part of the marketing mix. They can have a large impact on profit, so should be given the same consideration as promotion and advertising strategies. A higher or lower price can dramatically change both gross margins and sales volume. This indirectly affects other expenses by reducing storage costs, or creating opportunities for volume discounts with suppliers. 10.6 Glossary Term Description
It is a measure estimating the average price of consumer goods and Consumer Price Index services purchased by households. It is the most famous marketing term. Its elements are the basic, tactical components of a marketing plan. It is the study of the characteristics of human populations used for purposes of social studies. A cost that does not vary depending on production or sales levels, such as rent, property tax, insurance or interest expense. A cost that changes in proportion to a change in a companys activity or business.
Marketing Mix
Demographics
Fixed costs
Variable costs
10.7 Terminal Questions 1. Define retail management. 2. Elucidate parameters affecting Retail Management 3. Define Retail Price Index. 4. Explain the factors affecting the Retail Pricing Strategy 5. Explain how Consumption patterns in India affect the progress of Retail management.
10.8 Answers Self Assessment Questions: 1. Retailing 2. Project Evaluation 3. Demographics 4. Income segmentation
5. Pricing 6. Standard 7. Retail Price Index 8. Business model 9. True 10. True Terminal Questions: 1. Refer to section 10.1 (Hint: Introduction) 2. Refer to section 10.2 (Hint: Parameters Affecting Retail Management) 3. Refer to section 10.4 (Hint: Retail Price Index) 4. Refer to section 10.3 (Hint: Factors Affecting the Retail Pricing Strategy) 5. Refer to section 10.2 (Hint: Parameters Affecting Retail Management) 10.9 Case-let Emergence and evolution of BLOSSOMS: This case highlights the emergence and evolution of BLOSSOMS from a small garment manufacturer to the #1 retailer in India by the early 21st century. BLOSSOMS a small garment manufacturer, was just emerging in India. Due to the merge of rural urban divide and the varying incomes and lifestyles, it started emerging as quite a big centre for clothes and other products too. Here the evolution and growth of BLOSSOMS happened after mid 1990s, and then the launch of its first retail format clothing centre -GREENS, a family departmental store came up. Here, the marketing and promotional efforts undertaken by BLOSSOMS for GREENS, which made the store one of the most successful lifestyle stores in India in the early 2000s. Not only that, the varying incomes and lifestyles and emergence of young India made it quite a successful business for the BLOSSOMS. This helped BLOSSOMS entry into discount store and food store businesses through Big Bazaars and Food Bazaars and the strategies and marketing efforts put in place by BLOSSOMS promoted these formats into big sectors. BLOSSOMS expanded into many other businesses. Finally, it explored the future prospects in the light of the huge potential for organised retailing in India, intensified competition in the sector. The issues faced here are recent trends in the Indian retailing industry, changing requirements and preferences of consumers, understanding the changing consumer lifestyles and fulfilling their needs, and having a successful retailing format. BLOSSOMS overcame all these parameters and emerged as the #1 retailer in India.
Discussion Questions: 1. What are the issues faced by BLOSSOMS before emerging as a number one marketing sector? (Hint: Parameters) 2. What made the store one of the most successful lifestyle stores in India in the early 2000s? (Hint: promotional efforts)