Released on: February 25th 2009

Retail Industry Vertical

KINDUZ Business Consulting Pvt. Ltd.
India Office: +91-40-40165594
Enabling Sustained Business Excellence services@kinduz.com
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Released by: Aartee Roy

India Mobile: +91-9790915023
Email: aartee.roy@kinduz.com
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 Customer Centric Assortment Planning – India vs. Rest
A KINDUZ Research Initiative

Indian Retail About This report

209 million households, Indian Retail Industry is the largest employer after Agriculture (around 8% of
46 million consuming the Indian population) and it has the highest outlet density in the world
classes however the organized retail industry is still in a very nascent stage. The
market is mostly unorganized and it is dominated by fragmented Kirana
Modern Retail accounts stores (mom-and-pop stores) further weakened, by poor supply chain and
for 2-3% of the $350 backward integration. Desired skill sets (for e.g. logistics, demand planning,
billion Indian retail merchandizing, etc.) are not easily available due to the low maturity of the
industry. industry.

Indian Food market is Retailer‘s attraction for India is understandable but there are various reasons
estimated at $182 billion why the organized sector is still a negligible component of the complete retail
industry in India. Regional tastes in the Indian context take on a completely
new dimension – the purchasing parity, language, food, religion, and festivals
acquire a distinctly local element, within a few 100 kilometers. Understanding
these and tailoring the product offering, while maintaining the operational
profitability is a key skill that retailers will need to build to survive in this very
dynamic market.

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

customer-centric assortment, one which will initiate a fresh vision of how they
can consistently meet and ideally exceed consumer expectations. The key
would be to strategically decide on which levels (e.g. product level, store
level, etc.) differentiation is needed, while limiting the complexity and cost of
differentiating the assortment to local needs.

KINDUZ research shows that retailers need a system where the assortment
planning starts and ends with the customer. A system where the analysis of
customer trends and behavior, catchment analysis & competitor analysis are
all key to the assortment plan. A system where subsequently the actual
assortment is planned on a more granular level, for example by item and by
store cluster, which achieves previously set targets and supports the
assortment architecture from the category plans.

Internationally, retail giants like Walmart have initiated the incorporation of

localized elements into their product offering to capture the lost opportunity at
a regional level. Walmart has upgraded and tailored its merchandise mix in
five key categories that appeal to occasional Wal-Mart shoppers: consumer
electronics, pharmaceuticals, home goods, apparel and fresh food.

KINDUZ initiated a global research on how retailers approach Customer

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

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Table of Contents
Key Conclusions from the Research ........................................................... 4
Research Area 1: Challenges for 2009 ....................................................... 6
Research Area 2: Top Line Fulfillment at Store Level ................................. 7
Research Area 3: Regional Disparity .......................................................... 8
Research Area 4: Store Clustering for Mix Optimization ............................. 9
Research Area 5: Capturing Lost Opportunities at Regional Level............ 10
Research Area 6: Securing Bottom lines in a Decentralized Environment 11
Research Area 7: Most Popular Inventory Management Practices ........... 12
Research Methodology ............................................................................. 13
Respondent Profile ................................................................................... 13
 Customer Centric Assortment Planning – India vs. Rest
A KINDUZ Research Initiative

Key Conclusions from the Research

After aggregating our research results based on online surveys and face-to-face discussions with retailers
across the globe, certain key conclusions have emerged regarding current retail industry practices.
Conclusions that are directly related to the top line and bottom line

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

The toll of the recession is visible in full swing and most retailers around the world are struggling to uplift
their receding top lines. Ambitious business plans had been set during the 2007- 08 economic boom and
had been supported by aggressive resource allocations. Retailers are now figuring out how best to
salvage what is left of their resources, going into a consolidation and cost cutting mode.

Key Conclusion 2: For a store’s success, merchandise mix is the second most critical factor after
location

Good locations without a mix that captures the interest of the catchment, cannot sustain themselves for
long. If the location and mix are right for the target customer they would be pulled to the store and
reduces the need for push selling. Spending on aspects like right location, benchmarking against local
competitors can minimize the excess resource drain to market a concept.

Key Conclusion 3: Localized assortments can help boost sales volumes

While global retailers understand the importance of a localized mix, there are gaps in customer profiling
and catchment analytics to help customize the range to local requirements. In the Indian context – while
mix and location are given equal importance, customer profiling does not feature at any priority level,
reinforcing the need for Indian retailers to research their target market segments before allocating serious
resources for unplanned expansions both geographically and categorically.

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

Since resource efficiency and economies of scale will be hit if each store was to have a different mix,
stores are normally clustered based on average sales for mix optimization. However average bill sizes
need to be also reviewed while taking the average sale into account.

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

A wide variety of Stock Keeping Units (SKUs) could theoretically provide the Average Sale and Bill Size
projected for a store – however the regional brand mix already existing at a location should never be
overlooked. The regional brands, be it at a store or product level, have over their period of operation,
acquired insights and relationships with their customers which reflect in their brand positioning.
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 Customer Centric Assortment Planning – India vs. Rest
A KINDUZ Research Initiative

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

If decentralized sourcing is considered to inject the local feel into the merchandise mix, it is advisable to
maintain a pull strategy through the system whereby localized orders are consolidated at the corporate
level. This will help maintain predictable bottom lines and reduces the risk of brand dilution.

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

In both decentralized and centralized environments, ‗Stock On Hand‘ visibility across the chain of
operation is critical, in order to improve Return on Investment (ROI) and prevent accumulation of ageing
inventory. This requires dedicated and integrated Information Technology (IT) and Supply Chain
Management (SCM) departments to take charge of the complete Supply Chain.

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 Customer Centric Assortment Planning – India vs. Rest
A KINDUZ Research Initiative

Research Area 1: Challenges for 2009

Key Conclusion 1:
Retailers across the
globe are struggling
with shrinking Top
Lines
The four most recent recessions began with falling sales and falling
EBITA (Earning Before Interest, Tax and Amortization) in the consumer
discretionary sector while some sectors like consumer staples and health
care have been fairly resistant to recessions. In almost every recession
which was studied, sectors contracted much more quickly than they
recovered. Typically, it takes six to eight quarters for a sector‘s EBITA to
bottom out—fewer in 1973–75 and more in 1980–82. After the recession
of 2001, however, it took just over two years for most sectors to recover
their peak EBITA levels once they reached bottom.

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

impacting retailers across countries. Considering the state of the global
economy when the sales targets would have been set in beginning 2008
and the extent of recession at the time these responses were received,
much larger share of the international respondents claimed to have taken a
hit to their bottom lines as well, while inventories were not such a big
concern. But on the Indian side piling inventories have emerged as a slightly
greater concern area than the margin reductions, indicating that demand
planning in India is an area needing more focused attention. Indian
perception seems to fare better with regards to the expected hit to top lines
and bottom lines, when compared with the rest of the world.

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Key Conclusion 2:
Merchandise mix is the
most critical factor
after location, for the
success of a store
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A KINDUZ Research Initiative
Research Area 2: Top Line Fulfillment at
Store Level
While the challenges at a macro level are clear, these need to be drilled
down to a store level to be able to arrive at possible solutions. Across the
globe, location and then the merchandise mix emerged as the two most
critical factors for the success of a store. Internationally store location is
the primary success factor for a store followed by the assortment
offering. However, in India both location and merchandise mix are
equally important – reinstating, the diverse needs and preferences of
over a billion people.
It is important to reaffirm that location and mix cannot be successful in
isolation, they both need to be right. Location and store size will define
the brand‘s positioning in the catchment, and further benchmarking the
regional brand mix will minimize the excess resource drain to market a
concept. The location and the mix need to be marketed with a clear
focus on the target customer to be able to spearhead the brand
acceptability. However, it is the customer‘s experience on the floor and
their interaction with the sales staff which will encourage or discourage
them to visit again. Customer analytics which is the basis for identifying
the target customer and hence determining the estimated market size is
completely ignored in India as per the data available. Industry should
consider investing in research pertaining to customer demographics
before committing resources to aggressive plans.
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Key Conclusion 3:
Localized assortments
can help boost sales
volumes
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A KINDUZ Research Initiative
Research Area 3: Regional Disparity
The fact that merchandise mix is critical has been established without a
doubt and similarly what is it within the merchandise mix that needs to be
addressed is also critical. Globally the lack of localization of the
assortment is claimed to be the reason for the disparity in regional sales,
emerging from an inadequate understanding of the customer profile at
these regions. Inconsistency in replenishment leading to stock outs of
key SKUs followed as the third leading factor.
In the Indian context, extent of inefficiencies in replenishment clearly
state the maturity of international retail compared to India. Indian retailers
need to invest resources to streamline their end to end supply chain
networks to not only avoid stock outs but also better manage their
inventory positions.
While lack of customization of merchandise mix to local needs emerges
as the second most critical factor for Indian retailers, the correlation to
customer profiling does not exist. Reinforcing, again the need for Indian
retailers to research their target market segments before allocating
serious resources for unplanned expansions both geographically and
across categories. Without even attempting to research the customer
and catchment, there is no way that the mix can be suited to these
segments.
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Key Conclusion 4:
Store Clustering and
Mix Standardization
forms the basis for
Assortment Planning
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A KINDUZ Research Initiative
Research Area 4: Store Clustering for Mix
Optimization
John Fleming (Chief Merchandising Officer, Walmart) ―I worry most
about the in-store execution. It’s one thing to say, “We’ve got six
segments. We understand the assortment. We understand the
occasions. We understand the experience. We understand the
competitive set.” And it’s another thing to really make that work
operationally at the store level.‖
While a localized merchandise mix would definitely benefit both the top
line and the bottom line, achieving it, requires resources to be invested in
terms of catchment studies, customer profiling, benchmarking local
competitors etc. Since resource efficiency and economies of scale will be
hit if each store was to have a different mix, stores need to be clustered
based on some common parameters which will help standardize the mix
for that particular lot. Average sales are globally favored as the basis for
store clustering followed by geographical span. Clustering stores
geographically works well logistically, and helps combine similar regional
preferences. However, clusters based on average sales definitely need
to be viewed along with average ticket sizes to be able to arrive at the
correct pricing strategy for the target market segment. Ideally a mix of
geography and sales volumes should be considered, to arrive at the
most commercially viable basis for store clustering.
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Key Conclusion 5:
Assortment Plans need
to benchmark mix
against regional
brands
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Customer Centric Assortment Planning – India vs. Rest
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Research Area 5: Capturing Lost
Opportunities at Regional Level
Store clustering will help standardize the assortment plan to a large
extent thus streamlining the use of resources and time. Retailers can
adopt various means to identify and incorporate the localized elements
which can then become a part of the standard mix for a cluster of stores.
Globally, benchmarking product mix to include regional brands is the
most favored method to bring in the local touch into an otherwise
standard assortment. However, benchmarking requires a deep
understanding of not only the local catchment but also the brand
positioning of the retailer itself, to be able to capture regional elements
which fit or can be upgraded into the bigger picture.
As a secondary alternative, retailers are tied whether to increase
marketing spends; invest in better tracking and capturing of lost sales
into centralized assortments or to completely decentralize the whole
buying operation to the regional level. Decentralization could be a valid
proposition where the IT infrastructure is strong enough to provide clear
visibility across all levels of operation covering all geographical locations.
However despite that, decentralization could risk bringing in too much
diversity in the mix whereby the brand identity is lost. While fashion might
not be able to risk this extent of diversification, decentralization can be
ideal for consumer staples.
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Key Conclusion 6:
Backward integration
of store requirements
to prevent bottom line
depletion
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Customer Centric Assortment Planning – India vs. Rest
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Research Area 6: Securing Bottom lines in a
Decentralized Environment
Decentralization can also put the bottom lines at stake if the contracts
are not being negotiated in a centralized way. Decentralization could be
considered an option where complete visibility of regional operations is
possible and checks and balances can be put in place.
To preserve economies of scale and control bottom line depletion,
supplier negotiations need to be controlled at the center while actual
buying based on agreed terms could be carried forward by the regional
teams. This is only possible if the regional teams are equipped to handle
demand planning and forecasting.
Internationally, both push and pull strategies are favoured equally as
long as the control stays at the corporate – be it in terms of supplier
negotiations or backward consolidation of store orders respectively. This
would ensure better control on the buying patterns and efficient
implementation of changes in strategy.
Indian retailers do not favour backward integration of store requirements
and would rather consider allowing the region to operate as an
independent profit center, which might put their brand values at risk. How
they tackle this risk would be interesting to notice in the future.
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Key Conclusion 7:
Inventory visibility
across the chain is
required to keep
ageing under control
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Customer Centric Assortment Planning – India vs. Rest
A KINDUZ Research Initiative
Research Area 7: Most Popular Inventory
Management Practices
As was evident in earlier graphs, inventory seemed to be a bigger
problem for India than for the rest of the world even when most retailers
are operating in a centralized environment. Likelihood of this concern
growing in a decentralized environment is greater. Hence it is important
to understand global preferred practices for ageing inventory
management.
Globally in-store discounting and ensuring inventory visibility across all
locations are the two most preferred options for liquidating ageing
inventory. These are not possible without immaculate IT and SCM
backbones that are integrated. Predefined stock cover targets at store
and warehouse levels would need to work in tandem with the inventory
visibility. Mass discounters are a good channel for liquidating excess
inventory but at a further reduced margin; while discounting within your
store could generate additional sales and also salvage some minimum
margin. Retailers need to take a conscious call regarding the scale and
promotion of in store discounts, in tune with the brand image that they
want to communicate.
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 Customer Centric Assortment Planning – India vs. Rest
A KINDUZ Research Initiative

Research Methodology
Target respondents across the globe were approached
through emails, blog posts, invitations on various retail forums
and through personal meetings, to complete the survey
questionnaire. Post the initial contact three weeks time was
allowed to pass before the required sample size was
collected. Responses were then aggregated to provide an
overview. The respondents were further clustered into Indian
and international participants and responses were
aggregated again. The analysis also takes into account the
feedback received during face to face meetings with twelve
Indian retailers.

Respondent Profile
The survey received three hundred and twenty six responses
from all over the world, out which 69% were from India while
38% were from the rest of the world – primarily USA, UK,
Ireland, Russia and Thailand. 72% of responses were
received from people functioning in managerial to leadership
levels with greater than 4 years of industry experience. In
terms of business formats hypermarkets took the lead with
32% respondents selecting that format as the basis for their
choices. Department stores and mass discounters featured in
the same proportion with 25% respondents selecting each of
these formats. 43% of the respondents claimed that their
business format was meeting existing requirements of
customers while 32% were involved in aspirational selling of
select brands.

Respondent profiles did not vary much between Indian and

international respondents, excluding that bias from the
survey.

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RETAIL INDUSTRY CONSULTING AT KINDUZ
The retail vertical at KINDUZ provides end-to-
end consulting and implementation solutions.
The retail team consists of experts from varied
retail domains covering the complete retail cycle
from sourcing, merchandising, supply chain
management to operations. The senior team
jointly holds over 40 years of retail experience
with established retailers like Future Group
(Pantaloon), Aditya Birla (Trinethra), Landmark
Group ( Lifestyle) and Odyssey.
Our endeavor is to maintain a constant track of
relevant trends in the global and Indian retail
industry through regular research initiatives.
Our retail services include:
1. Catchment Analytics
2. Customer Profiling
3. Competition Mapping & Benchmarking
4. Defining Brand USP
5. Assortment Planning
6. Format Feasibility Analysis
7. Multiple Channel Retailing
For Retail Consulting and Research services
contact us at:
aartee.roy@kinduz.com
Contact Phone: +91- 9790915023
Join the RETAIL INSIGHTS Network at:
http://kinduz.ning.com/group/retail
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A KINDUZ Research Initiative
ABOUT KINDUZ
KINDUZ Business Consulting enables
'Sustainable Business Excellence' for its clients,
through its services around Industry Research
and Insights, Business Process Management,
Human Development Management and
Business Excellence.
Founded in 2008 by senior industry experts from
global companies like Capgemini, Motorola,
Wipro, Oracle, Ford, ING, TATA Group, and
Lifestyle, KINDUZ currently provides consulting
services in India and Middle East.
Head Office Address:
#5-62/9/22-B, V.V. Nagar,
St. No.8, Habsiguda,
Hyderabad,
Andhra Pradesh,
India.
ZIP: 500 007
Contact Phone: +91-40-40165594
Website: http://www.kinduz.com/
For Consulting services contact us at:
services@kinduz.com
For Research services contact us at:
research@kinduz.com
Access the KINDUZ Consulting Network at:
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