Retail Operations

UNIT 17 MONITORING AND

CONTROLLING RETAIL
OPERATIONS
Objectives

After going through thus unit, you should be able to

• understand the need of controlling in retail operation;

• understand the concept of merchandise decision matrix;

• implement the merchandise matrix in different kinds of retail formats;

• understand the need for category management in organized retailing;

• analyze the importance of planning in organised retailing;

• understand to use the different kinds of ratios in performance analysis;

• measure and monitor performance of one retail outlet to another; and

• understand the methods of monitoring retail outlets by maintaining uniformity.

Structure
17.1 Introduction
17.2 The Merchandise Decision Matrix
17.3 Merchandise Management in Organised Retail Category Management
17.4 Merchandise Planning - The Key In Category Management
17.5 Measuring Profitability In Retail Operations
17.6 Monitoring Performance In Retail Operations
17.7 Maintaining Uniformity Across Retail Outlets
17.8 Summary
17.9 Self Assessment Questions
17.10 Further Readings

17.1 INTRODUCTION
As you are aware that every business needs to be closely monitored and effectively
controlled for the purpose of growth and developments, this approach assumes
significance in retail business as the retailer, face the challenges of increasing
competition, shrinking margins, and economic slowdowns are bringing about
changes in thinking and the way they do business. Some retailers are beginning to
take a much more serious look at managing the top line, and are showing the benefits.
Controlling is the follow-up function of retail management. This is when the actual
performance is compared with planned performance to spot and evaluate deviations
or corrections, if any.
The retail industry covers numerous market segments and differing business needs.
But one critical point unites the retail world: high overhead and narrow profit
margins make customer retention a key factor in a retailer's bottom-line performance.
58 And because today's savvy customers demand positive,
personalized service, choosing the right technology - at the right price - can mean the Monitoring and Controlling
difference between business success and business failure. Looking for emerging Retail Operations
technologies to meet their needs, successful retailers will choose to avoid the pitfalls
of rigid proprietary systems - being locked in to a single IT vendor who dictates what
hardware to use, what operating system (OS) to arrange, and what software to run. Of
course, controlling the supply and distribution chain is critical to all retailers. As
margins shrink and delivery time requirements shorten, tracking a product from
consumer order to shipment is vital. The right solutions are needed to help enable
retailers to maximize efficiencies and meet the extreme load demands they
experience in seasonal peaks throughout the year. The success of retailing lies in
providing the consumer with the right product - at the right time and at the right
place.

• Clear understanding of customer needs.

• Well-run store operations.

• Seamless and efficient Supply Chain.

• Proper matching demand and supply to enable the maintenance of stocks at each
location.

Shops fronts, displays and promotions are all much needed parts, but the heart of
modern organized retailing is merchandise and supply chain management. In an ideal
world, before the world beats a path to its door, a retailer would have a right quantity
of the right merchandise in the right place, at the right time. In the world of retailing,
this process is termed as merchandise management. Evident here is that there are
many variables and decision points involving goods within a retail operation.

A retailer aims for two goals:

• To satisfy the consumer and

• To maximize financials gains at the same time.

So the key factor here to managing the goods, i.e. which implies making the decision
of what to sell, hence the two major functions are supply chain management and
merchandise management. Both these areas of business optimization encompass
many activities and functions.

Cross Docking, a supply chain innovation which originated in the early nineties in
the grocery business, would not have been possible without close co-ordination
between possible merchandising and SCM teams.

Developing competence in merchandise management is a must in retail chains.

Infact, globally successful retailers have tried to develop excellence in merchandising
as a means to building competitive advantage.

Wal-Mart, the leading retailer in the world, which has successfully come, up with
many innovations, and is considered as the storehouse of best practices in the
industry, owes most of its triumphs to its policies in merchandising and supply chain
management

17.2 THE MERCHANDISE - DECISION MATRIX

The retail manager deals with multiple supply points and sourcing points. He/she also
deals with many more items than the other businesses. Best examples of this are

• Leading garments and departmental stores like Shoppers' Stop and Globus, which
sell about 100,000 to 1,50,000 different SKU's. 59
Retail Operations • Food supermarkets like FoodWorld and Nilgiris stocks about 4000 to 5000
different items

• 7-eleven, a leading fod retailer has about 20000 locations worldwide while Wal-
Mart owns than 2000 stores.

An organized retailer deals with more than 700 to 800 suppliers whereas large
international retailers can have a few thousands of suppliers spread globally. Added
to this the number of suppliers and items handles is the complication of shelf-life,
which can be as little as one day for fresh foods or just one season for fashion
garments. Dealing with such fragmented numbers on both forward and backward
linkages would make the need for collaboration between the merchandiser and supply
chain manager, highly important. While the retail merchandiser of a large chain has
to look at the broader context of all the activities directly or indirectly associated with
procuring and reselling merchandise.

So how does Merchandising Work?

Merchandising is more than just an important factors for neighborhood shops like
kirana (grocery) or fabric shops. It is, infact their most critical operation. Most of
such shops are very small, less than 500 square feet. These shops know that they
cannot stock a broad range of merchandise large neighbourhood shop might store
800-700 SKU'S, a fraction of what an organized outlet does. The key to store the
right items and to maximize-stocks turns.

In the Indian scenario, most of the retail trade is with mom-and pop stores. These
follow more than basic retail practices, which may have changed only marginally
since the advent of the concept of a retail outlet. For most of these stores, location is
decided by default based on where the owner stays or owns property.

However, in this case because of its small-scale operations, the shop owner cannot
afford to make any effort at establishing a supply chain. Most of the shops depend on
vendors to knock on their door with supplies or occasional some member of the
family goes to the wholesaler to buy the goods. While a small consumer durable store
might use the telephone to get in touch with a company or distributor to ask for
replenishments.

The new retail chains entering the Indian market in the last few years are trying to
build in very different practices. These are inspired by systems followed by leading
international chains. Many of these are assisted by international consultancies like
AT Kearney, McKinsey, Anderson and KSA Technopak, who help transplant the
best international practices to the Indian scenario. This could help Indian companies
leapfrog a few stages of development into state-of-the-art practices in merchandise
and supply chain management.

Activity 1

Interview a retailer in your locality to identify the decision factors he uses to analyze
the merchandise in his outlet.

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17.3 MERCHANDISE MANAGEMENT IN ORGANISED Monitoring and Controlling
Retail Operations
RETAIL CATEGORY MANAGEMENT

Most of the international players follow category management to effectively

undertake their merchandising and buying functions. A category is a basic unit of
analysis for making merchandising decisions. In general, category is an assortment of
items that the customer sees as reasonable substitutes for each other. The
fundamental of category management revolve around managing categories as
Strategic Business Units.

Need for Category Management

The need for category management come from the need to reduce product
proliferation, to lift sales and market shares to focus on end-to-end market offering.
The whole concept is a customer driven approach, with an aim to answer questions
like who is the consumer, why, what, when, how much and. how he/she' is buying.
The focus of this study of the customer decision-making process is on identifying the
factors that are external and internal to the store, which influence the customer
purchase. The idea is to use this information to tailor the offering to consumer needs.
The offering is then measures in terms of sales, cost and return per square foot so as
to identify the optimum time required to get the highest return and to optimize the
value for the customer. The whole process is interplay between customer satisfaction
and maximizing returns for the organisation.

An idea of merchandising practices can be had from Macy's, a large US based

department store department store chain. Complexities increase when the store
became multi-locational, and the chains tried to centralize functions, for maximum
efficiency. However, with size, a simple buyer's function was not enough, and new
roles developed.

The role of buyer and planner remain key to category management as well. The buyer
is responsible for working with vendors, for the selection and pricing of merchandise
and for coordinating promotions with advertising department and stores. The buyer's
challenge is to compose an assortment that is appealing to the organization's intended
customers and to obtain the best possible goods at the lowest possible prices.

The planner is also responsible for forecasting the correct quantities of each item,
allocating those items to stores, monitoring sales, and suggesting markdowns. A
planner projects sales and inventories based on an analysis of sales history, current
market trends and organization's performance objectives.

• In case of more complex organisations, there are individual category managers'

for various products, who report to the buyer, while

• In smaller organisations, one may have a buyer handling more than one category
the merchandising process can be very inefficient for retailers who don't embrace
category management.

Nature of Allocation in Category Management

Another function, traditionally below the buyer, is that a distributor or an allocator,

who allocates the arriving shipments of merchandise to individual stores, based on
the store's capacity, current sales trends and inventory levels. They are critical link
between the merchandising department and the stores. Then there is a product,
developer, who determines which products can develop internally with the store's
private label. They also establish specifications for the design, production and
packaging of the goods. In the past, retail sales have been
61
Retail Operations difficult to measure and manage. Most retailers know what their sales will be, (within
a level of tolerance). This projection is then used to base payroll, advertising, and
many other expenses.

Division of Categories into Sub-categories

The extent to which large global retailers have evolved roles is evident from the
classification system evolved by American National Retail Federation. (NRF). NRF
has come out with its own structure of a merchandising and planning department,
which is followed by major department store chains like Federated Stores Inc, which
now owns Macy's. According to this, the first level in a merchandising and planning
department is the merchandise group, which is further broken into departments, with
departmental heads. A number of buyers report to each departmental heads, with
each buyer responsible for a particular classification of merchandise in that division.
Each merchandise is the broken into categories where category managers are
assigned. The category manager is the last link in the entire merchandise department
and he is responsible for all SKU's in his category.

For Example: A design of this function in a category managed retail organization;

consider a garment departmental store chain. This could have Menswear as a
merchandise group, within which there could be various departments like formal
wear, casual wear sports wear and occasional wear. These could be further broken
into buying roles like buyer-suits, buyer-cotton shirts, buyer-blended shirts for formal
wear, where each product-suit, cotton shirt, and so on- is a classification. Each buyer
has various categories to manage. The category manager is responsible for the entire
range of activities within that category. Thus a category manager for a plain shirt will
be responsible for the procurement, manufacturer, warehousing, distribution, sales
and customer service of this category. The sole objective of this one-point control is
to develop seamless flow of information on that particular category within the
organization so as to remove all obstacles and to measure the performance of this
category. The idea is to identify the barriers at each stage and to optimize the returns
from that category.

Category management also demands entering into strategic understandings with the
vendors. Some internal retailers turn to one favoured vendor to help them to manager
the entire category. This vendor is known as the category captain and he/she forms an
alliance with the retailer to help gain consumer insight, satisfy consumer needs and
improve the performance and profit potential across the entire category. This vendor
also provides the retailer with a planogram, which a diagram that illustrates exactly
where every SKU in the category should be placed.

17.4 MERCHANDISE PLANNING - THE KEY IN

CATEGORY MANAGEMENT

An effective category management starts with the assigning roles, functions and
performance targets to various categories. These steps serve two key goals and they
are:

1) Positioning of the store in the market and

2) Influencing future decision-making processes.

Formerly, assigning roles to various categories helps the retailers to establish the
importance of a particular product to the store.

62 Four roles can be identified for categories: destination, routine, impulse and
convenience.
For example, if the retailer wants his/her store to be ultimate in men's garments, all Monitoring and Controlling
menswear becomes the destination category on the other hand, if the retailer wants Retail Operations
the shopper to merely include menswear on their shopping trip; menswear becomes a
routine category. The allocation of space, pricing, promotion and assortment all
depends on the role of each category as defined by the retailer. The store
management needs to identify and define all the above parameters, before planning
for the category.

The identification of the category role becomes much more pertinent in the case of
supermarkets, where a decision on whether a category falls into a destination, routine,
convenience or impulse mode has a substantial impact on the circulation flow and
allocation within the outlet. By organizing the merchandise in planned categories, the
retailer can actually make the customer move through the store in predetermined
fashion, which can help maximize sales.

Planning consists of two steps

1) At the management level and

2) At the category manager level.

The top management is concerned with forecasting of sales and the estimation of
space to be allocated to each category. This is a two-pronged process, which involves
forecasting for both the category and store. Targets are set for sales, gross margins,
inventory turnover, discounts, mark-ups, stock levels and margins for each store and
category. These annual projections and further broken into seasonal projections for
these stores and the categories. Thus the top management looks at the big
merchandising direction for the company, which is called as the top-down planning.

The category manager takes a more micro approach, wherein he studies the
categories' past performance and trends in market place.

Methods of Category Planning and Analysis

The category manager then prepares a range or assortment plan, a procurement plan
and a distribution plan.

The Assortment Plan: This deals with the merchandise mix that the category
manager feels would sell in the coming year. The key factors considered while
making an assortment plan are the range of prices, brands and sizes to be purchased
based on the merchandise strategy of the store. The idea is to try and achieve the
sales and profit per square foot target laid down by the top-level management. The
physical characteristics of the store play an important role, as it size determines how
much of merchandise it can store. The category manager has also to make
adjustments for complementary merchandise. Assortment planning requires inputs
from the various internal and external sources. The internal sources are typically past
sales data, the budget for the future and the merchandising strategy of the retail
organization. The various external sources are consumer and trade publications, trade
associations, forecasting service providers, suppliers and consultants.

The Procurement Plan: Once the assortment plan has been prepared, the
procurement plan is formulated. The procurement plan involves decisions pertaining
to what, how much, when and from whom to buy. Here the product availability
aspect of the assortment plan becomes vital. Procurement practices have to be
different for different kinds of merchandise. The important distinction to make is
staple .vs. seasonal merchandise. In the case of staple merchandise, a more
mechanical system of inventory management is used. Staple merchandise is
replenished based on the amount of units sold during a typical selling period, the
lead-time for the arrival of reorders and a safety (or base and back-up) stock.
63
Retail Operations There are various methods to calculate stick levels. Some of them are as follows:

• Basic Stock Method: this method asserts that the stock at the beginning of a
month should be equal to planned sales plus basic inventory. Thus, it is the
planned sales divided by inventory turnaround ratio.

• Percentage Variation Method: this method asserts that the stock at the
beginning of a month should be a percentage of the average inventory. The
percentage is defined as 0.5*(1+(planed sales for month / average monthly sales)

• Stock-to Sales Ratio: This method asserts that the stock at the beginning of a
month should be equal to the number of times of the expected stock-to-sales
ratio.

• Week of Supply Method: This method asserts that the amount of inventory
required to support planned sales for a week is based on the number of weeks
that an inventory will last relative to a desired turnover and planned sales. This
reflects the number or days that an inventory will last if sold at the current rate of
sale. Most of the merchandise in food and discount stores falls under the staple
merchandise category. Here an inventory management report is prepared, which
provides information on sales velocity, inventory availability, inventory turnover
data, product availability, index back up stock data, forecasts and the point of
order. While planning for fashion merchandise, the assortment plan provides a
general outline of what types of merchandise should be carried. The procurement
plan is used to determine how much money to spend in each month on a
particular category of fashion merchandise, given the sales forecast and inventory
turnover.

Merchandise Allocation Methods (%)

Source: NRF Survey, 1998

c) The Distribution Plan: Allocation of merchandise to the stores is based on the

ABC analysis, which measures individual store profiles. The basis of the ABC
analysis is to maximize sales per square foot. For a particular category stores are
classified as A, B, or C- based on the sales of that category in that store.

Activity 2

Design a plan for two different types of retail outlets in your city and discuss the
reasons of your choice?

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17.5 MEASURING PROFITABILITY IN RETAIL Monitoring and Controlling
Retail Operations
OPERATIONS

Sample Measure of Retailers

Retail Outlet Footfalls/day Conversion (%) Average Bill Size

Shoppers' stop 4000 35-40 1000

Pantaloon 3500 30 850
KBN 2000 20 1500
Planet M 3500 40 250
Ebony 3000 50 700
Meena bazaar 2000 45 1000
Nilgiris 5000 60 300

From the above table, we can draw a clear analysis of how retailers are measuring
their operation results.

Let's start by comparing the Footfalls/day from one type of retail outlet to another
type.

• Supermarkets and discount chains are likely to see a higher rate of footfalls /day
in this case, Nilgiris has reported 5000 footfalls/day in comparison with the rest.
Like Nilgirirs, FoodWorld (food supermarkets), Subhiksha (discount chain) and
the like, also enjoy a lot of prospective customers visiting the store everyday.
More than 70-80% of these supermarkets stock foodstuff and related groceries
which are daily essentials for people, hence this is one major reason why this
type of retail outlets encounter more number of visits/ day in comparison with the
other types of retail formats.

• In comparison to the above, there is only a medium rate of footfalls/day observed

in departmental stores. This again is bound to vary. Departmental stores like
Shoppers' Stop which stocks national brands enjoy a higher rate of 4000
footfalls/day in comparison to Pantaloon and Ebony that is targeted for the
upscale customers and has 3500 and 3000 footfalls/day respectively. Upscale
consumers thrives on branded names and fascinating ambience, but contributes to
a smaller population than the upper middle class and middle class consumers of
India. Since Shoppers' Stop also has designer labeled perfumes and accessories to
its credit, the apparel section is welcoming a huge crowd otherwise.

• 65
Retail Operations • KBN is again an upmarket retail outlet, which displays only designer label and
branded items selling luxury and richness. Apart from the fact that these are total
non-essentials and not an everyday use item, it is also for a higher income strata
market segment. Hence, even if there are people visiting the store, all of them
need not be purchasers. With that note, KBN do observe 2000 footfalls/day.

• Almost in league are the specialty stores like Planet M and Meena Bazaar. In
comparison to the other types of retail outlets. Selling only specific product
category like in this case, Planet M sells only music CDs, cassettes and other
related categories like DVDs etc while Meena Bazaar specialized in textiles only
So, such retail formats are seen to observe around 3500 and 2000 footfalls/day
respectively.

Now lets make a comparative analysis of conversion (percentage) reported in each

type of retail formats.

• Starting with supermarkets and discount chains, the table shows Nilgiris enjoying
the highest conversion rates of 60 % As mentioned before,, supermarkets and
discount chains like FoodWorld, Subhiksha, Vitan and in this case Nilgiris,
stocks daily need essential items and hence the number of people walking into
the store are mostly purchasers.

• Almost close in league would be the specialty stores since the visitors come there
mostly with an intention to purchase. From this case, we can see that the
conversion rate of Planet M and Meena Bazaar is almost alike enjoying a 50%
and 45% respectively.

• Pantaloon and Shoppers stop are departmental stores stocking national brands
hence, a wider audience can be expected to stroll in and observe the stock, yet the
ultimate purchasers need to be large. In this case, it is noticed that the conversion
rate for stores stocking national brands is slightly higher at the range of 30-45%,
yet it is also observed that the stores stocking private labeled brands like for
example Westside, is lower in comparison.

• Coming to stores exclusively for upscale consumers like KBN, it is seen to have
a low rate of conversion of about 20 % in comparison to the other types of retail
formats.

Finally, let us examine yet another important performance measuring method i.e.
evaluating the average bill size in a particular retail format. The bill size is
determined by the cost of purchase of the items sold in each type of retail outlets. So
regardless of the conversion rates and footfalls/day, the bill size can be contrasting in
figures. Lets make an analysis on it.

• Since the items stocks in supermarkets, discount chains and the like are mostly
food items and groceries, which are sold, are nominal price in comparison to
branded and designer accessories, the average bill size of supermarkets will
significantly small in comparison. As see in the table, the average bill size of
Nilgiris and for that matter other supermarkets like FoodWorld is around Rs. 300
only

• Coming to departmental store, which gathers a significant bill size everyday. As

seen in this table, Shoppers' Stop is enjoying an average bill size of Rs.1000 as it
stocks mostly national brands and has a wider assortment of items too. Yet the
departmental stores like Ebony and Pantaloon have average bill size of only 700
and 850 Rs. respectively.

• There is difference between two types of specialty stores here. Planet M deals in
66 music cassettes and CDs which are purchased selectively and
 Monitoring and Controlling
Retail Operations

Sample Measures of Indian Retailer And Analysis

Retail outlets No. of Total square Square feet per Sales per
employees feet area (SFT) employees square feet (Rs)

Shoppers' Stop 920 230000 250 7800-8700

Globus 150 75000 500 N.A
Benzer 225-275 12000 45-50 4000
KBN 150 16000 100 16250
Croissants 250 8000 30 12500
Vijay sales 125 3000 240 2000
Rhythm house 50 2500 50 24000
Vitan 500 50000 100 6000
Nallis 1000 75000 150 4000
Landmark 50 20400 408 5882
FoodWorld 1500 180000 120 7500
Wearhouse 400 100000 250 3000
Kemps 500 330000 660 7000

The above table has various types of retail formats and measures the productivity of
each type depending upon the square feet of each retail outlet and the number of
employees each possess. Lets make analysis on the above-mentioned sample:

• Since Shoppers Stop, and similar department stores stocks assorted national
branded goods, the number of employees are more and therefore the sales per
square feet is also more depending upon the range of accessories to apparels they
have. The employees or in this case salesmen are also spread throughout the store
to attend their customers for their varied-needs. Globus is comparatively having
smaller square feet size hence the number of employees are also lesser, in
relation to this the sales per square feet is predicted to be lower than Shoppers'
Stop.

• Coming to retail outlets like Benzer and KBN exclusively for the chic and
fashionable lot, has undoubtedly a smaller store just to display designer labeled
items which are not stocked in bulk and presented elegantly to the customers. Yet
being an upmarket store outlets, where individual attention from salesmen is
preferred, the square feet per employee is an impressive lot of 100 and even
impressive is the sales derived per square feet of around 16,250, like in the case
of KBN. Similar analysis can be done for Benzer too.

• Corning to specialty stores like Landmark and Nallis, while landmark is selling
more of home furnishing and lighting and Nallis is exclusively selling Indian
sarees and related textiles. Yet because of the space occupied by
67
Retail Operations items like home furnishings, Landmark has around 50 employees for its stores
and square feet per employee is obviously around 408. In comparison to this,
Nallis is able to stack its sarees and the item doesn't occupy much of space yet
needs plenty of employees to handle the customer purchase, hence it is seen that
such a specialty store has around 1000 employees. Therefore the sale per square
feet is also an impressive amount of 40000.

• Supermarkets like FoodWorld, on the contrary is more of a self service and has
lesser employees per each store and therefore because of the spreading of the
employees around the store, the square feet per employee is only around 150.
Supermarkets, discount chains and hypermarkets need a huge store of around or
more than 100000 square feet to stock its assorted items of purchase and also in
huge quantities. Since most of the products are bought in bulk and on a daily
basis, the sale per square feet is mostly around 40000.

From this another important analytical methods called sales per employee ratio can
be derived. Take a look at this sample table to understand it better.

From this we can make the analysis that

• Food chains don't require much of personalized attention and the customers
believe in self service and salesmen attend to them only to give direction and
give them the price of the item Yet again food chains stock items in bulk and the
square feet allotted to such outlets is huge in comparison to the other retail
outlets. Almost a similar analysis can be made for Books & Music. The total
square feet area for such stores will be lesser but the number of employees in
such outlets will be slightly more.. With the type of items to be purchased in
these stores, it enjoys more sales per employee, as the statistics says around 10-
15 lakhs of sales per employee.

• On the contrary, garments and durables will have a higher rate of sales per
employee as the numbers of employees in such store will be high almost at the
rate of 200-300 and the sales will differ slightly for durables as the price will be
slightly higher for durables in comparison to garments.

(Source: The sample tables in the, illustrations are compiled after detailed discussion
with experts)

17.6 MONITORING PERFORMANCE IN RETAIL

OPERATIONS
The retail performance can be measured through several ratios. A retailer can
compare his performance against industry average or ratios achieved by similar
Retailers to judge effectiveness along defined parameters.

• Illustration No 3

Lets examine the calculation of Stock Rotation Ratios in order to monitor the
68 performance of retail operations.
 Stock Turnaround /Year Monitoring and Controlling
Retail Operations

From above table we see that Stock Rotation of:

• Supermarkets like Food World and discount stores like Subhiksha is very high as
compared to Departmental stores like Shopper Stop and specialty stores like
Planet M. This is because Super markets and discount stores sell Fast Moving
Consumer Goods (FMCG) while

• Departmental stores may sell a wide variety of fashion products. The stock
rotation of a very large departmental store in USA can be very low since it may
stock the entire collection in a category and some products may not move very
fast. Hence, a retailer should compare his stock turn over ratio with similar
stores. Generally if stock rotation ratio is low the retailer has to have higher
margins

Sale Per Square Feet: An Important Monitoring Technique

A sale per square feet (SPF) is a measure of how well the retail outlet is using the
space allotted. SPF differs among industries - for example, a big box discounter with
high inventory turnover (such as Costco) is going to have a much higher SPF than a
clothing chain or sports equipment outlet. Another key element is location; SPF is
typically much higher for merchants in a destination mall, than for similar stores in a
local shopping center - of course, you pay much higher rent at the big mall.

• Illustration No: 4

Sales per sq feet

The Indian super market is obviously more efficient as seen from above in terms of
sales per sq feet than the local Kirana store. Hence it can compete better by offering
lower prices. The US food retailers have even higher sales per sq. feet. Carrefour has
higher sales per sq. feet than US food retailers since it is a discount hypermarket and
attracts very large footfalls and conversions. However, the more relevant ratio to
measure would be profit/sq feet since profit is a better measure of performance. Mr.
Melwani of Kemp Fort suggests a figure of Rs. 2800 profit per sq feet. However,
these ratios would also vary 69
Retail Operations depending on location. Sales and profit per sq feet have to be higher in central
business districts to cover the high property/rental costs.

(Source: The sample tables in the illustrations are compiled after detailed discussion
with experts)

Relevance of Sale Per Square Feet in Retail Operations

• An upward trend in SPF is almost always a positive sign of a retailer's health,

whereas a downward trend in SPF is often a warning sign that business
performance is suffering - even if the company's total sales are increasing. A
particularly striking example is the Gap stores. Let's compare the company's SPF
and adjusted stock price at the end of its last several fiscal years:
Gap Stores Sales per Foot Adjusted Stock % % Change
Fiscal Year End (SPF) Price @ Fiscal Change Stock Price
Year End SPF

January 1998 $ 463 $ 17

January 1999 $ 532 $ 42 + 15% +147%

January 2000 $548 $ 44 + 3% + 5%
January 2001 $482 $ 32 - 12% - 27%
January 2002 $394 $ 14 - 18% - 56%
January 2003 $349 $ 14 - 11% n/c

Despite total sales increases in each year, SPF clearly had more impact on the Gap's
adjusted stock price - increases in SPF resulted in increases in the stock price, and
decreases in SPF had a significant negative effect on investor's perception of the
company's performance. To some extent, the decrease in SPF is related to the Gap's
aggressive growth since expansion often requires establishing new stores in locations
that will generate less foot traffic and a lower SPF than earlier established stores, as
well as siphoning sales from existing stores. Regardless of the reasons, a decline in
SPF is typically not viewed favorably by the investment community.
Assuming the store size is reasonable, there are many reasons for a poor SPF relative
to competitors. Here are 10 primary reasons for a low SPF - these are considerations
for retailers of all sizes:
1) Poor product/merchandising mix
2) Insufficient floor inventory (i.e. empty shelves, missing sizes)
3) Un-competitive pricing
4) Poor location and Non-optimal store hours
5) Poor sales & customer service personnel
6) Poor store layout & design
7) Insufficient /poor marketing
8) Fixed Consumer perception
Return on Investment - An Important Monitoring Technique
Apart from all the above ratios used to monitor performance in retail operations, the
ideal ratio is considered to be the Return On Investment. Here the retailers can
evaluate the investment potential by comparing the magnitude and timing of expected
gains to the investment costs. For example, the ROI for a new operation program that
70
is expected to cost $500,000 over the next five years and
deliver an additional $700,000 in increased profits during the same time? Simple ROI Monitoring and Controlling
= (Profit - Investment Costs) / Investment Costs = ($700,000 - 500,000) / $500,000 = Retail Operations
40%

As an accounting valuation method, it is popularly calculated as

ROI = Net Income / Book Value of Assets

Simple ROI works well in situations where both the gains and the costs of an
investment are easily known. Other things being equal, the investment with the higher
ROI is the better investment. In complex business settings, however, it is not always
easy to match specific returns (such as increased profits) with the specific costs that
bring them, and this makes ROI less trustworthy as a guide for decision support.
Simple ROI also becomes less trustworthy as a useful metric when the cost figures
include allocated or indirect costs, which are probably not caused directly by the
action or the investment.

17.7 MAINTAINING UNIFORMITY ACROSS RETAIL

OUTLETS
Retailers may have hundreds/thousands of outlets across the country or World. For
example Mc Donald has over 35,000 outlets in over 120 countries. Even large retail
chains in India like Subhiksha, Food World etc and Restaurant chains like Haldiram
and Nirulas have many outlets scattered over the country.

When the retail chain has large number of outlets spread over many cities a major
challenge is maintaining uniformity in policies, practices and processes across these
outlets to provide a uniform and consistent service experience. Paying constant and
explicit attention to the details of the business is how the retailer establishes
uniformity in company arrangement.

Systems of Maintaining Uniformity in Large Retail Chain

Three main mechanisms are generally used for measuring and evaluating uniformity
in a large retail chains:

• Field Audits: Audits are conducted by central or supervisory staff measuring

service levels and performance. A good example will be the audit conducted in
premises of computer training centers, say Aptech, that checks on a standardized
syllabus prescribed to students and common practice of conducting classes. In
most cases access to the financial records also is allowed to confirm the
uniformity

• Mystery Shoppers: A mystery shopper is an anonymous visitor who comes as a

normal customer and rates the service experience and later on provides a report
to the retailer about it. He/She can be an external consultant hired by company to
pose as a customer and submit report on his shopping experience. The purpose of
Mystery Shoppers is to help businesses increase sales and improve employee
customer service awareness. Continuing with our example in the case of a
restaurant, a mystery shopper walks in and orders a meal and the entire dining
experience is videotaped. When the tape is sent to the restaurant officials it will
also include a voice-over indicating the places where he/she has taken note of
points, like poor service, faulty restrooms etc.

• Management Information System (MIS): MIS helps in maintaining

standardization by measuring in detail the ratio of inputs to outputs through
computerized methods. A Point-of-sale system is defined for the chain of Amul
outlets, which includes points of sale, inventory management, Data Transfer to
central server facility by telephone line using (Remote Access Service) and
secure E-cash transaction with smart cards. 71
Retail Operations
17.8 SUMMARY
To sum up our discussion, Controlling is the follow-up function of retail management
which helps in comparing the actual performance with the expected performance to
spot and evaluate deviations or corrections, for further rectifications. The success of
retailing lies in providing the consumer with the right product - at the right time and
at the right place. Further we learnt the need of category management come from the
need to reduce product abundance and to raise sales. The retailer's challenge is to
arrange a range of merchandise that is appealing to the retail firm's prospective
customers and to gain the best possible goods at the lowest possible prices.

In order to serve this purpose, the merchandise group is further broken into
departments or categories for easy monitoring, with each assigned to the buyer who
is responsible for a particular classification of merchandise in that division. The
category manager is the last link in the entire merchandise department and he is
responsible for all SKU's in his category.

We also covered on the topic of the allocation of space, pricing, promotion and
assortment, which depends on the role of each category as defined by the retailer.
Apart from this, we had four detailed illustrations discussing the use of ratios like
stock turnover /year, sales/profit per year, profit per square feet etc in providing
analytical comparison between different types of retail outlets like departmental
stores, supermarkets, discount chains and specialty stores.

When the retail chain has large number of outlets spread over many cities a major
task is maintaining uniformity in policies, practices and processes across these outlets
to provide a uniform and consistent service experience. This can be done by the
employees for the three main mechanisms of maintaining uniformity i.e. Field
Audits, Mystery Shoppers and Management Information Systems (MIS). Hence it is
largely important in paying constant and precise attention to the details in order to
establish uniformity in retail operations.

17.9 SELF ASSESSMENT QUESTIONS

1) Discuss the significance of having control over retail operations?

2) Define merchandise management and how is it performed in organised retailing?

3) Discuss the different kinds of merchandise allocation methods chosen by

retailers?

4) Describe the various activity ratios utilized by retailers in measuring performance

and also point out the choice from one retail format to another?

5) Discuss the relevance of uniformity across retail outlets? Support with examples
while explaining the three mechanisms of maintaining uniformity in retail
operations?

17.10 FURTHER READINGS

Berman and Evans 1985\ Retail Management: A Strategic Approach, Macmillan
Publishing Company, New York, NY.

Chetan Bajaj, Rajnish Tuli, Nidhi V. Srivastva (2005) Retail Management, Oxford
University Press

Levy and Weitz 2O02, Retailing Management, Tata McGraw-Hill Publishing

Company Ltd., New Delhi
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