SDM Project Report

8/3/2019 SDM Project Report.

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Sales &Distribution

Management

A study on the Sales &

Distribution of Mens Apparel

Guru Govind Mishra B10019

Murali P. Pathak B10029

Piyush Pathneja B10035

Vibhu Mangla B10059

BM-A (2010-12)


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Mens Apparel Page 1

CONTENTS

Indian Retail Industry- An Introduction .............................................................................................2

Classification of the Indian Retail Industry ........................................................................................3

Indian Apparel Market ................................................................................................................................5

Analysis of the Jamshedpur Market ......................................................................................................7

Three formats Under Study ......................................................................................................................9

Retail Profiling for Levis Jeans ............................................................................................................ 13

Bargaining Power of Retailers .............................................................................................................. 21

Cost of Stock Out ......................................................................................................................................... 22

Marketing Implications for the Different Formats ...................................................................... 26


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INDIAN RETAIL INDUSTRY- AN INTRODUCTION

The retail industry in India is currently growing at a great pace and is expected to go up to US$ 833

billion by the year 2013. It is further expected to reach US$ 1.3 trillion by the year 2018 at a CAGR of

10%. As the country has got a high growth rates, the consumer spending has also gone up and is also

expected to go up further in the future. In the last four year, the consumer spending in India climbed

up to 75%. As a result, the India retail industry is expected to grow further in the future days. By the

year 2013, the organized sector is also expected to grow at a CAGR of 40% According to the 8th

Annual Global Retail Development Index (GRDI) of AT Kearney, India retail industry is the most

promising emerging market for investment. In 2007, the retail trade in India had a share of 8-10% in

the GDP (Gross Domestic Product) of the country. In 2009, it rose to 12%. It is also expected to reach

22% by 2011. By 2017, the organized sector will be 20% of the total market share. It can be

mentioned here that, the share of organized sector in 2007 was 7.5% of the total retail market.

Today, the retail sector in India is worth $410 billion and accounts for about 10% of Ind ias GDP and

8 % of its employment. Organized retail in India is still in its

nascent stages, accounting for only 5% of the market share,

much lower than those seen in other countries as shown in

the box alongside. It is one of the toughest sectors to operate

in owing to low margins and intense competition. What

makes this category such an exciting future prospect is that it

is projected to expand to 2.5 times its present size (AT

Kearney Global Retail Index) over the next three years, to

achieve a market share amounting to over 50 billion dollars.

This projection is supported by the fact that the share of organized retail in the Chinese retail sector

has grown over 7 times in the last fifteen years.


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Retail

Food RetailClothes &Apparel

CLASSIFICATION OF THE INDIAN RETAIL INDUSTRY

The traditional classification is as follows:

1. FOOD RETAILSupermarkets: They are grocery stores larger in size than the

neighbourhood kirana shop and with greater variety on offer,

supermarkets can cater to customers who want a good

shopping experience on a regular basis without compromising

on affordability. Food bazaar is an example of this format.

Hypermarkets: They are super-sized stores that combine

supermarkets and department stores and carry a vast range of

products. Hyper markets fulfill consumers weekly shopping

requirements in just one trip. A popular example is the Future

Group's Big Bazaar chain.

Cash-and-Carry: Wholesale warehouses that cater mostly to

the needs of nearby retail outlets, these stores are oftenfrequented by individual consumers as well. Bharti-Walmart

has begun its Cash and-Carry operations in Punjab.


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Retail

ConsumerDurables

Electronics &Appliances

JewleryBooks &

Music

2. CLOTHING & APPARELNational Chain Stores (NCS): These are department stores

that carry products of a multitude of brands besides their

inhouse labels. Brands staff and operate shop-in-shops in

the retail spaces within an NCS. Shoppers Stop is a

prominent NCS

Multi-Brand Outlets (MBO): An MBO acts as a franchisee

for several brands which belong to the same retail segment,

such as sportswear or jewelry. An example of this format is

Planet Sports.

Single-Brand Stores: These stores are run by brands

themselves or their franchisees. They usually carry a richer

selection of the brands products as compared to an NCS or

an MBO. Nike has several single-brand outlets in India.

Malls: Umbrella shopping centers that lease space to NCS,

MBOs and single- brand outlets, malls enrich the shopping

experience by providing other facilities such as food courts,

fine dining and entertainment arcades.

Another method of classification based on product related verticals is as follows.


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INDIAN APPAREL MARKET

The estimates of 2009 show that the Indian apparel market is worth INR 1,542.5 bn, as against the

revised figure of INR 1,359.3 bn for 2008. In volume terms, 692.5 bn units were sold in 2009 as

against last years 627.9 bn units. The overall value growth in 2009 over 2008 was 13.5 percent,

while volumes grew at 17.2 percent. Based on the existing trend, it is projected that the Indian

apparel market will grow to INR 2,401.7 bn by 2014 at a CAGR 9.3 percent, provided the overall

economic scenario remains more or less stabilised at existing levels.

Volumes in the Indian apparel market over the six-year period of 2002-09 have gone up steadily

from 4,422 mn units in 2002 to 6,925 mn units in 2009. Value growth has been more pronounced. In

value terms, the Indian apparel market has grown from INR 613.0 bn in 2002 to INR 1,542.5 bn in

2009.

Of the INR 1,542.5 bn apparel market, the menswear segment continues to take up the lions share

at INR 556.4 bn (36.1 Hard Currency percent) even though this figure is a decline from 36.6 percent

market share in 2008. Womenswear accounts for 32.2 percent market share (INR 497.1 bn)

followed by 24.8 percent market share for the kidswear and uniforms segments (INR 382.0 bn) and

6.9 percent market share of unisex apparel (INR 107.1 bn). When compared to last year, all

segments - menswear, womenswear, kidswear and uniforms - have grown their market share.


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ANALYSIS OF THE JAMSHEDPUR MARKET

BENEFITS OF CATERING TO TIER 2 CITIES

Unlike metros, consumers in small towns are less concerned about the global upheaval . With the 6th

pay commission being implemented in the government sector, the disposable income in the hands of

the residents of these cities has increased substantially. Tier-II cities have some additional

advantages like prime space and lower rents which make them attractive.

DEMOGRAPHICS

Jamshedpur is one of the most important industrial areas in India. In fact, Jamshedpur is known as

the 'Pittsburgh of India'. Therefore, the urban population of the city is higher than the rural

population. It is estimated that about 47.31% of the population resides in the rural areas; whereas

the urban areas consists of 52.69% of the population of Jamshedpur.

The urban population is very much into shopping because very less other means of spending their

money in this city so appending on apparels and food is more than other tier -2 city average.

JAMSHEDPUR MARKET

Shopping in Jamshedpur is one of the most pleasurable and exciting experiences among shopping

freaks because of the availability of very less entertainment options. There is a vast array of

shopping markets in Jamshedpur. The three major shopping spots in Jamshedpur are the Bistupur,

Sakchi and the Jugsalai markets.

The branded apparels are mainly present as exclusive showrooms in Jamshedpur i.e. if one wants to

go shopping the branded way then the Bistupur market is a must visit since it has the stores and

factory outlets of almost all the leading brands of the world like REEBOK, ADIDAS, JOHN PLAYERS,

UNITED COLORS OF BENETTON, NIKE, FILA, ALLEN SOLLY, PETER ENGLAND, CATMOSS, GINI

& JONY.

The culture of Multi Brand Outlets is not very much prevalent in Jamshedpur but one outlet of this

nature is The Shoppers Square Mini Mall. This was the first of its kind to be built in Jamshedpur and

is responsible for introducing the mall culture to the Jamshedpurians. This mall houses some of the

leading brands of the world like LEVIS, SPYKAR, KILLER, D-DAMAS etc. It also attracts a large

number of youngsters because of its beautifully designed interiors.


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Apart from there is huge market for unorganized / unbranded apparels in Jamshedpur. Multi

storied stores like BAZAAR KOLKATA, CITI STYLE, CITI BAZAAR etc which have all types of

clothes, furnishings and accessories at affordable prices. The market also houses some of the brands

such as CHARLIE OUTLAW, LIVERPOOL etc.

Another place for shopping in Jamshedpur is the Jugsalai market which is also known as the BURRA

BAZAAR of Jamshedpur. Although Jugsalai is a very old, unplanned and congested place to shop yet

its the best locale in the steel city to purchase everything at amazing wholesale rates.

JAMSHEDPUR APPAREL MARKET

Jamshedpur is a typical tier 2 city and is getting attraction of brands in last few years only.

Consumer Demand is estimated to have dropped by 20-30% during last quarter in metros for

apparels despite the use of sales and huge discounts. Roughly, organized retail brands and

unbranded apparel have proportional market share of almost 50:50 in metros while this ratio varies

from 80:20 to 90:10 in smaller markets. Branded majors are now hoping to cash in on this potential

of Tier 2 cities at a time when consumption has dipped in metros .


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THREE FORMATS UNDER STUDY

We visited three different formats which sell Mens apparels. All the three formats have different

characteristics in terms of selling strategy and the distribution network that they possess for OTC

selling. The three formats were Modern Retail Outlet, Single-brand and Multi-brand outlet, which

will be discussed one by one going forward.

MODERN RETAIL OUTLET

These types of store are majorly part of hypermarkets like Big Bazaar, etc. We visited Big Bazaar

outlet here in Jamshedpur and one section of it had apparel section. Normally it is kept at a separate

corner of the store due to the fact that it is a medium-high involvement product for the customer

and hence he or she will search for the location by himself / herself. Also, such outlets store multiple

brands like Levis, Lee and few local brands too, due to the mix bag of target customers reaching the

outlets.

For Levis products, store places the order for apparels in high demand on three monthly basis. They

dont offer much width or depth of same brand, but do offer variety in terms of choice of brands. The

order is placed to the Big Bazaar Kolkata office and that is re-directed to the respective

distributor/company and the ordered material is received within 15-20 days.

In Mens apparel section, they have 3-4 product lines and 5-6 varieties present on an average for

each product line. They normally keep the sizes varying from S to XXL and keep an inventory ofaround 3-4 units /size. That makes the inventory of only mens section to be more than 1000+ units

at a given time for a given brand.

Average footfall per day for the store is estimated to be 200-300 customers/day. Out of that total

number of customers, around 50-60 visit the apparel section on daily basis. Average bill value per

customer visiting the shop is estimated to be Rs.1000-1500.

The salesmen are not assigned corresponding to a particular brand due to the presence of too many

brands in the outlet. Normally customers roam around by themselves in the store and look for their

choices which are followed by help given by salesmen in getting the desired colour or sizes as per

demand. The service in the outlet is not comparable to the one that someone gets in single brand

outlet models. As the basic proposition of store is based on discounting and hence not much focus is

given on providing customer service, etc.


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The targets are given on overall sales basis to store which is currently around 25-30 lakh per month

for Mango outlet. The margin given by distributor on the sale of clothing varies from 25-30% which

is relatively lesser than what is offered to single brand outlets i.e. company showrooms. The store is

having its primary catchment area around Mango and Sakshi. They dont sell any imported products

as done by other single-brand outlets of Levis.

Big Bazaar runs on discount store theme and hence seasonal sales and consumer discounts are

readily available in these stores. For Levis it works on profit-sharing model where the discount

offered to customers is carried by both the firms equally.

SINGLE-BRAND OUTLET (LEVIS)

This type of store are either company owned showrooms or the ones placed on franchise model.

The store visited in Jamshedpur got open in October and it works on 50-50 partnership model of

franchise and company. Major categories present in the shop were mens and womens apparelincluding formal and informal wears and winter clothes too.

The factory of Levis is situated in Bangalore from where all the orders are dispersed to various

distributor points. Patna region has one super distributor which supplies the clothes to most of the

eastern part of the country. The order is normally placed on six months advance basis based on

catalogue and demand is estimated for given designs and wears based on the local consumer

behaviour. This order is send to distributor and he subsequently places it to the head office in

Mumbai. In case of sudden increase in demand of particular clothing, order is emergently placed and

within a span of 15-20 days, the same is made available to the store from distributor.

In Mens apparel section, they have 6-7 product lines and 8-9 varieties present on an average for

each product line. They normally keep the sizes varying from S to XXL and keep an inventory of

around 5-6 units /size. That makes the inventory of only mens section to be more than 3000+ units

at a given time.

Average footfall per day for the store in Bistupur is estimated to be 25-30 customers/day. Averagebill value per customer visiting the shop is estimated to be Rs.1500-2200. The reason of such high

bill value per customer is the high-end products present in the shop which are mainly targeted

towards middle and upper segment of the society.

The salesman and saleswomen are known as FCs i.e. Fashion Consultant. They are well trained to

perform up-selling and cross-selling and interact with the customer to engage them efficiently. This


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single outlet model is more of a speciality store where broad assortment of apparel is kept and the

depth is found to be average. This concept is different from the other stores ofLevis which work on

multi-brand outlet model as later contains comparatively lesser width in the varieties offered.

The targets are given on overall sales basis to store which is currently around 15 lakh per month for

Bistupur outlet. The margin given by distributor on the sale of clothing varies from 35-57% which

clearly suggests that they cant rely much on volumes and is much higher than what is offered for a

normal FMCG product i.e. in the range of 8-10% on average basis. The store is having its primary

catchment area around Bistupur, C.H.Area and Sakshi. They even sell some imported products on

demand from the customer and this delivery is done through a different channel direct from

company bypassing the distributor intermediary.

They run discount sales twice in a year and proper advertising is done through newspapers and

billboards on prime location to attract more and more customers. There are total of 7 employees in

the store including manager and fashion consultant. Their payroll is based on fixed component and

variable one which majorly comprises of group sales targets and smileys achieved on individual

basis.

MULTI-BRAND OUTLET (CITY STYLE)

These kinds of stores are majorly popular in smaller cities like Varanasi, Allahabad, Jamshedpur, etc.

They are majorly focussed on Lower and lower middle segment and keep and assortment mix of

different brands falling in the price range of Rs.100-500. Major categories present in the store were

mens apparels, womens apparel, household apparel, cosmetics, etc. Mens apparel majorly included

shirt, jeans, trousers, jackets, sweaters, socks, undergarments and accessories. All these varieties are

present majorly of local bands and thats the reason of such low pricing strategy in this store. The

store is running in Bistupur from last 7-8 years. It is more like a discount store which gives seasonal

discounts regularly to its customers.

This model works on branch basis, i.e. the headquarter of City Style is present in Kolkata and it has 7

branches in Jamshedpur, Varanasi, Allahabad, Dhanbad, etc. The order is given based on the

consumer demand estimation for each brand, each style, each size, color and other criteria. Once the

order is placed from branches, it reaches Kolkata which is diverted to the respective manufacturing

companies for procurement purpose. This whole process of order and receiving the package takes

around 15-20 days and usually orders are placed on monthly or bi-monthly basis barring

emergency situations.


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In Mens apparel section, they keep 11-12 product lines and around 70-80 brands corresponding to

each item like shirt, jeans, etc. The store layout is freestyle and hence is looks very cluttered due to

discount format of the store proposition. Average footfall per day for the store is around 200-300

customers. Average sales per day come out to be 40,000-50,000 and they clearly play on volume

here due to low prices.

There are total of 38 employees including 36 salesman and 2 managers. The basic strategy for

selling is push-based and no specific demand from customers is really entertained. The overall

targets are given to store on three month basis based on sales achieved. No specific brand based

targets are set for the stores. The employees in the store work on fixed salary and no particular

margin is set for the retail format as it is company owned outlet only.

They run discount sales thrice a year and proper advertising is done through newspapers and

billboards on prime location to attract more and more customers. They believe in bulk selling of the

merchandise and know that customers will come from the segment that they are targeting because

of the variety of brands made available to them.


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ManufacturingHub

(Bangalore)

RegionalWarehouse

C&F Agent

ExclusiveCompany

Owned Outlet

Multi BrandOutlets

Modern TradeOutlets

ExclusiveFranchisee

Stores

RETAIL PROFILING FOR LEVIS JEANS

Levis sells its denim trousers and jeans for both men and women through various formats. In depth

interviews with retailers were conducted to ascertain the channel structure as designed by Levis

for the sale of its products. Through these interviews, the channel design for Levis was arrived at

which is approximately as shown below:

The manufacturing centre for Levis in India is in Bangalore. They are then transported to regional

warehouses. It has 4 regional warehouses in the country:

Bangalore Southern Region Patna Eastern Region Gurgaon- Northern Region Pune- Western Region

From these warehouses, the goods are transported to the C&F agents in the respective states. The

various types of outlets then take over the goods from the C&F agent. For the purpose of this study,

we shall look in to the profiling of 3 kinds of outlets, viz.:

Exclusive Company Owned Outlets Multi Brand Outlets Modern Trade Outlets


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Before we delve into the profiling of the stores, we need to develop an understanding of the

consumer behavior process for the problem of purchase of a pair of jeans and understand the cost of

stock out and bargaining power for each of the store types. This would help us develop a complete

retail profile. In pursuance of this, we shall be using the framework as elucidated below:

BRAND V/S STORE DECISION & TIME-PLACE UTILITIES

The decision making process in the case of purchasing in a pair of jeans is that of a limited decision

making category. Some of the most important factors that go into the purchase of a pair of jeans are:

Size Colour Fit Brand

Consumers who look for utilitarian benefit out of the product generally place comfort of fit as the

most important decision making criterion. Such consumers who seek prestige benefit out of the

product tend to place the brand as the paramount decision making parameter, with the other

factors being secondary to the brand parameter.

Since Levis tends to sell its jeans in the near premium category, it targets such consumers for whom

brand is the most important decision making parameter. Hence, understanding the brand decision

process of this category is fairly important to the marketing of this product. With respect to the

consumers of this brand, the marketing has been successful in moving the decision process from

Brand vs.

Store Decision

Service tobe provided

by company

Bargaining

Power of

outlet

Cost ofStock-out

Service

provided by

competitor

Time Utility

Place Utility


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low uncertainty of untried brands to high uncertainty of untried brands. Since the brand plays on

the theme of finding an identity for oneself and seeking prestige in the society, it makes it

imperative that the consumers who are loyal to the brand wait for it, in case it is not available.

The exclusive outlets satisfy the needs of such consumers who seek an extensive range of products

of the Levis brand. They have most of the SKUs that have a strong demand. However, those which

have very less demand or are considered super-premium are stocked exclusively by these stores.

Also, since consumers are generally willing to wait for such a product, the inventory is generally

maintained at low levels.

The multi brand outlets satisfy the needs of variety seeking and value seeking consumers who are

brand aware, prefer purchasing branded jeans, but would like to compare a few brands to find out

which one provides the best value for their money, before making a purchase decision. These

consumers usually visit these stores because they make planned purchase in this case. In suchstores, the SKUs which are quick selling are mostly stocked. Those which are super-premium are

rarely stocked in such outlets. In this case, the store loyalty is generally higher than the brand

loyalty.

The modern retail outlets satisfy the needs of those consumers who view shopping as a leisurely

activity and generally do not make a planned purchase for jeans at such stores. They display picking

behavior and make a purchase decision, only if they find that all the decision parameters are fully

satisfied. In such stores, the SKUs which are generally fast moving and belong to the latest trends in

fashion are stocked.

The choice of the store for purchase of a pair of Levis jeans depends on the following parameters :

Intent of shopping Location Reputation of the store Service level offered Sales promotion offered by the store

Since this is a product which entails a limited decision making the store decision normally

dominates. A person would go to the nearest store first, if he wishes to compare various brands and


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choose the best among them. The consumer would prefer to visit an exclusive store because of the

following reasons:

He is not sure of the colour, stitch etc. However, he wants to purchase a Levis jeansirrespective of the other factors. The exclusive store gives him the confidence that the

products would be originally branded and not belong to some spurious manufacturers

which might be the case in some multi brand outlets

He wants to see a broad range of jeans and then decide what is best suits him

The following table sums up the place and time utilities for the decision processes that are involved

in the purchase of a pair of Levis jeans:

Decision Process

Uncertainty of

untried brands Place Utility Time Utility

Variety Seeking LowNearest multi-brand

outlet

Immediate

purchase neede

Cannot wait for the

product. If at all

waiting is required,

it would be for a

very limited amount

of time

Limited Problem Solving High

Willing to travel to

another outlet or an

exclusive showroom

for the product

desired

Can wait for the

product desired for

an extended amount

of time


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SERVICE LEVELS OFFERED

The service levels offered in each of the formats is different. The involvement of the sales person in

the consumers decision making process varies across the formats. The following table discusses the

involvement of the salespersons across formats with reasons given for classifying it so:

FormatInvolvement of the

salesperson required

during the decision process

Reason

Exclusive Store High

The salespersons in these exclusive stores

are called fashion consultants. They

generally assist the consumer by giving

tips to them throughout the process of

trying out different product and help

them choose the colour, size etc. which

fits them right

Multi brand outletHigh if very few brands are

stocked. Low if many brands

are stocked

The salespersons in stores with few

brands behave like salespersons of the

exclusive stores. However, if there are

many brands stocked, they handle an

individual counter and do not offer the

consumer help through the entire

process

Modern Retail

OutletLow

The salespersons in modern retail outlets

do not exclusively look after the apparels

segment. Hence they do not involve

themselves in the consumers decision

making process


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Having established the service levels at each of the retail formats for Levis jeans, we can now turn

to identifying the selling style by the retailers for each of them.

Format Consumer Decision Making Selling Style

Exclusive Store Limited Problem Solving

The salespersons should adopt the new

business selling strategy. I (Salesman)

am OK and you (Consumer) are OK

should be the approach taken by such

salesmen. Analytical thinking is

necessary to understand the consumers

requirement and sell them the desired

product

Multi brand outlet Variety seeking

If the store stocks very few brands, then

the salesmen should adopt the new

business selling strategy as mentionedin the box above. However, if the store

stocks many brands, the salesman

should adopt a trade selling strategy. I

(Salesman) am not OK and you

(Consumer) are OK should be the

approach taken by such salesmen

Modern Retail

OutletVariety Seeking

Since the store such as these generally

stock many brands, the salesmen should

adopt the trade selling strategy. I(Salesman) am not OK and you

(Consumer) are OK should be the

approach taken by such salesmen


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SERVICE ORIENTATION

In each of the formats mentioned above, a different kind of service orientation needs to be taken

adhered to. It should take into account the sellers willingness to engage in selling as well as building

a relationship with the consumer.

In an exclusive store, the fashion consultants should provide service towards increasing the value

proposition of the product being sold. This generally entails good service at the point of purchase

and would include:

Providing a conducive environment in line with the consumers need, like providing acomfortable shopping ambience in the store by installing adequate lighting, air

conditioners etc.

Helping the consumer identify his needs and choose a product best suited for him Pampering the consumer during the purchase process to help him have a memorable

shopping experience

In a multi-brand retail outlet, it has been established that the salesmen generally have a low

involvement in the decision making process of the consumer. Hence the service orientation should

be towards reducing the post purchase dissonance. This could be done in the following manners:

Provide post-sale service. This could include handling the customer complaints withregards to the size, colour, fit etc. Any faulty products should be immediately replaced.Prompt service helps maintain a strong relationship with the consumer and spread a

positive word of mouth

Provide services like alteration of the purchased jeans in case the consumer is concernedabout the fit of the product

The purchase of jeans which happens in a modern retail store, is similar to that of a multi brand

retail outlet. Hence the salesmen in such stores should display a similar service orientation as that

shown in the multi brand retail outlets


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RETAIL PROFILE SUMMARY

The following table summarises the retail profile of each of the 3 formats that have been taken up as

a part of this study:

Factor

Exclusive Company

Owned Outlet

Multi Brand Retail

Outlet Modern Retail Outlet

Customer buying

situation

Satisfies the need of a

customer who wants to

select the product from

a wide range offered by

the brand. Depth of

assortment is critical.

Satisfies the need of a

customer who wishes

to select the brand

after comparing with

various brands.

Product intensity

should be high.

Satisfies the need of

a customer who

views shopping as a

leisurely activity and

purchases

product only if all the

decision parameters

are fully satisfied.

Type of localityLocated in a posh, high

end commercial area

Located in a central

commercial business

area

Located on the

outskirts of the city

Factors influencing

choice of brand

Availability of the

desired product

Price, colour, size and

other product related

factors

Promotional activity,

differentiation of the

brand from others,

ambience

Customer

PatronageVery loyal to the brand

Brand aware, but not

very loyal to the brandNot very brand loyal

Details of Stocks

A wide range of

products is maintained,

including both slow

and fast moving

products

Only fast moving

products are stocked

High fashion

products relevant to

the latest trends are

stocked along with

fast moving products

Service Levels

RequiredHigh on service

High on service if very

few brands arestocked. Low in service

is many brands are

stocked

Low to average on

service

Profitability of

retailer from the

product category

High marginsRelatively lesser

marginsHigh margins


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BARGAINING POWER OF RETAILERS

All the three formats mentioned above realize different levels of bargaining power with company.

The reason being the different nature of business they are into and the number of alternative

options each of the format has to counter the companys enforced decisions. Major conflict that can

happen between company and the retailer is on margins, shelf-space, tagging by company i.e.

pushing low demand products with high demand products and other factors. In such cases, single

brand outlet faces a disadvantage as compared to other two retail formats due to lack of choices that

are given to them. Though the tradeoffs is made by getting relatively higher margins from company,

but that sometimes act as additional advantage for company too for putting up pressure on the

outlet for keeping few stocks.

At the same time, for other two formats, the bargaining power of retailer is much higher due to the

options that are present with them. Company cant put pressure on such outlets beyond certain

limits, because in that case it will be more of companys loss than stores loss. And this is the reason

that the margins are relatively lower for such outlets than single brand one and company prefers to

stock only those items that are in demand to avoid any losses.


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COST OF STOCK OUT

Cost of stock out is defined as the cumulative loss to the company/brand caused by loss of sales,

profit and good-will due to non-availability of material when the consumers wanted it. Cost of stock

out is directly related to the bargaining power of the outlet and with the higher cost of stock out at

an outlet, the bargaining power of the outlet also increases correspondingly. Thus the extent of the

service being provided at a retail outlet will depend upon the cost of stock out.

In todays retailing environment of increasing competition the companies are adopting cost cutting

strategies and one of the most common strategy adopted is that of maintain extremely lean

inventories but these reduced inventory levels become too lean if the sales are lost because of

these.

One of the formulas that can be used for calculating a cost of stock out is as follows:

CS = (NDOS * AUSPD * PPU) + CC1

Where,

CS = Cost of a Stock out

NDOS = Number of days out of stock

AUSPD = Average units sold per day

PPU = Price per unit or profit per unit

CC = Cost of consequences

Here, consequences includes costs associated with a production line that has been idled or must be

switched over to accommodate another process due to the stock out

One of the other methods of determining consumer reaction to retail stock out situation and how

varying responses can be translated into an economic cost to the retailer is the use of Basic stockout model as proposed in Stockout Cost Models Empirical Tests in a Retail Situation by C. K. Walter

AND John R. Grabner

1 Source:http://www.nextlevelpurchasing.com/articles/stockout-cost.html
http://www.nextlevelpurchasing.com/articles/stockout-cost.htmlhttp://www.nextlevelpurchasing.com/articles/stockout-cost.htmlhttp://www.nextlevelpurchasing.com/articles/stockout-cost.htmlhttp://www.nextlevelpurchasing.com/articles/stockout-cost.html


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BASIC STOCK OUT MODEL

This model explains how a customer reacts in a situation when faced with a stock out.

When a customer enters a store with an intention to purchase a product which is governed by

product type, price, brand, size, and quantity, the consumer can face to situations either the productis in stock or not. If the product is in stock the consumer will purchase the item in the process

furnishing revenue to the store and satisfying his own requirement. However, if the desired item is

not in stock, the customer must decide on an alternative to his desired purchase. Here consumer

can look for a substitute for the product or brands in various price ranges, substitute another size

of his first choice brand, delay his purchase until a new shipment is received by the store, or

take his business to another source of supply. All these choices made by consumer have an

economic consequence for the retail store which can be measured in terms of the revenue

difference, RD, between the intended purchase and the actual purchase.

RD = PA PO

Where, PO = Price of Out-of-stock item

PA = Price of item actually purchased


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Revenue difference can be positive, zero or negative depending upon the choice made by the

consumer. In the worst case scenario if the consumer decides to leave the store without making a

purchased RD = - PO.

Two modifications to the basic revenue difference equation expand it to the general situation. First,

an amount equal to the value of the lost consumption during the waiting time until the customer

makes a return trip is subtracted. The simplifying assumptions are made that the customer had

exhausted his home supply of the product and demand cannot be accumulated. New parameters

are:

AU = Annual number of Units of the item purchased under in-stock conditions

WT = Waiting Time as a fraction of a year

Second, quantities other than single units are permitted by using these multipliers:

UA = Units Actually purchased

UO = Units desired but Out of stock

The general case revenue difference equation is then written:

RD = [(UA * PA) - (UO * PO) - (AU * WT * PA)]

Thus the cost of stock out or the revenue difference will be governed by other factors like the type of

product with lower chances of a loss of sales in low involvement product with the customer might

pick up a substitute in case a product is not available whereas in case of a high involvement product

the revenue difference might be high with consumer preferring a bran and is not ready to buy a

substitute. Also in turn it will be governed by the factors like brand loyalty, willingness of customer

to wait for the product and chances the customer will return again to purchase the product in case

of a stock out. In our study we have made use of the basic stock out model for calculating the cost of

stock out for the three formats of the retail outlets selling the men apparels. The assumption made

in our study is that in case the consumer doesnt find the product that he is looking for he will leave

the store without making the purchase, as no data was available on the alternate purchases made by

the consumer in case he doesnt find the item that he is looking for. Hence for calculating the cost of

stock out the above formula gets reduced to

RD = - PO


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COST OF STOCK OUT FOR THE THREE FORMATS CHOSEN

ParameterExclusive Store

(Levis)

Multi Brand

Outlet

Modern Retail

Outlet

Average monthly footfall 1050 6000

25000 (For

Apparels

approx. 2500)

Average Bill Value 2000 1000 1200

Customer Lost due to stock out in a month 30 200 150

Average Sales in a month 1500000 1200000 3000000

Cost of stock out in a month 60000 200000 180000

Percentage of Sales 4 16.67 6

Yearly Cost of Stock out 720000 2400000 2160000

Thus the calculations reflect that the cost of stock out in a Multi brand outlet is much higher as

compared to an exclusive store. This might be because of the reason that a loss of sale due to a stock

out in a multiband outlet also hampers the chances of up- selling


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MARKETING IMPLICATIONS FOR THE DIFFERENT FORMATS

Now that the profiling for each of the formats is done and the cost of stock-out derived, we look into

the marketing implications that these formats have. The following table gives details about the said

implications:

FactorExclusive Company

Owned Outlet

Multi Brand Retail

Outlet

Modern Retail

Outlet

Cost of stock out

for the company

Cost of stock out is

relatively low (approx.

4% of the monthly sales)


relatively high

(approx. 17% of the

monthly sales)


relatively high

(approx. 6% of the

monthly sales)

Display Space Space available is high

High is very few

brands are stocked.

Low if many brands

are stocked

High

Bargaining power

of the companyHigh Limited Very Low

Inventory to be

maintained

A full range of products

needs to be maintained

Fast moving products

need to be amply

stocked. Slow moving

ones can be given a

miss

Fast moving and

high fashion

products need to be

amply stocked

Suited for

push/pull /display

/information etc.

Pull/display/information

Pull/display if very

few brands are

stocked. Push if many

brands are stocked

Pull/display

The information given in the above table could be used by managers to gain a better understanding

of the dynamics of the retailing industry with a specific focus on mens apparel. The insights

developed through this could help an organization understand the powers at play in the market and

help them manage them better.

Documents

SDM Project Report