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RETAIL IN INDIA
Prof. Prem Vrat1
Akshay Jain2
Prateek Raj3
This paper focuses primarily on the Small and Medium Scale Retail Sector of India which is
largely unorganized. Faced by stiff competition from major enterprises like Reliance and WalMart, that allocate considerable amount of resources on research and development of tools for
increasing competitiveness and efficiency, a systematic study on the application of Industrial
Engineering Principles in unorganized retail sector is an important area of study and of relevance
to the Indian Economy. The paper attempts to present an in-depth study of retail sector of India,
organized and unorganized, and identifies parameters for defining competitiveness in the context
of Indian Retail. Integrating Quality Function Deployment (QFD) analysis with the Kano model
the paper highlights major technical issues related to Kirana and Apparel Shops. A model for
optimizing product assortment in a small unorganized store has been presented, with the
introduction of the concept of linear cross elasticity. It highlights the managerial insights gained
through the study.
Keywords- Unorganized retail sector, India, Kirana, Competitiveness, QFD analysis, Product
Assortment, Heuristic
1.
Introduction
Retailing is a booming sector of the Indian Economy primarily owing to the opening of FDI in
retail sector and coming up of hypermarkets and retail chains. Organized retailing is pitted to grow
at a rate of 35% while the unorganized retailing only at the rate of 6%. It is expected that organized
retailing will have 10-15% of the industry share by 2010. Thus faced by a stiff competition, the
small traditional trade outlets need to enhance competitiveness of the unorganized retail sector of
India, so that they can not only deal with the challenges faced by the coming up of multinationals
and hypermarkets, but also capitalize from this retail boom.
Working further on one of the major technical issues of product assortment, a case study has been
presented. A model and its heuristic algorithm have been developed for effective product
assortment of products over the existing demand, with the introduction of the parameter of linear
cross elasticity.
General Study
Papers relating to the current state of retail sector in India were studied. The summary report by
Boston Analytics, 2009 (1) provided factual information about the traditional retailing in India as
compared to modern retailing and advised the companies to take into consideration the unique
diversity of retail sector of India. It also discussed the issues multinational face due to the
unorganized nature of traditional retailing in India. But nothing was discussed regarding the threats
faced by modern retailing on traditional retailing.
The report by A.T. Kearney (2) on growth in retail sector in BRIC economies and CII - A.T.
Kearney, 2006 (3) on the need of organized sector for sustained growth in India, showed the huge
scope for growth in the sector though much of the potential was shown in organized retailing. The
detailed report by Joseph, etal. 2008 (4) was very relevant to this study as it discussed in detail the
impact of organized retailing over unorganized retailing. The unorganized retailers in the vicinity
of organized retailers experienced a decline in sales and profit in the initial years of the entry of
organized retailers. The adverse impact, however, weakened over time. The study indicated how
consumers and farmers benefited from organized retailers. The study also examined the impact on
intermediaries and manufacturers. Based on the results of the surveys, the study made a number of
specific policy recommendations for regulating the interaction of large retailers with small
suppliers and for strengthening the competitive response of the unorganized retailers.
Based on the literature review and general study two types of separate segments of shopping for a
general customer are identified. These two types are Routine Shopping and Occasional Shopping.
Routine Shopping comprises of shopping of products that are routinely required on a daily or
monthly basis. It comprises mainly of the following segments of the retail market:
Personal Care
Occasional Shopping comprises of shopping of products that are bought occasionally without a
routine pattern. It comprises mainly of the following segments of the retail market.
Footwear
Consumer Durables
The requirements and shopping patterns for the two segments tend to be different and therefore
their analysis has been done separately.
Organized Stores- Small stores like Reliance Fresh and Subhiksha in large neighborhood
markets and Hypermarkets like Big Bazaar in larger markets and shopping malls.
In occasional shopping only Apparels has been focused on in the paper as it is the most significant
contributor to occasional shopping in retail and its stores comprise of the following types:
Unorganized stores- Variety Shops selling a wide range of apparels and shops specializing in
specific garments like Saris etc. Such shops are generally found in large markets, like Sarojani
Nagar in New Delhi.
Organized stores- Large retail chains like Shoppers stop and Westside found generally in
Malls and markets like Cannaught Place and small franchise outlets, for example Reebok or Levis
found in the same markets as well as markets like Sarojani or Lajpat Nagar in New Delhi.
Taking inputs from the designed questionnaires and parameters in related papers like Batt, 2008
(5) and, Mahua Dutta, 2008 (6) a pilot survey was conducted and the following eight factors are
identified that cover most of the Retail Purchase Factors (RPF) affecting the choice of retail stores.
An analysis on each of these factors is given:
Proximity (The reach ability of the retail store)- In case of grocery it was observed that
importance of proximity was same across profiles while it is not an important factor in case of
apparel.
Product Assortment (The variety and quality of product) - Product Assortment is equally
important for grocery and apparel. But product assortment elements differed for apparel and
grocery.
Infrastructure (The layout, amenities and appearance) - This factor was perceived differently
Price (The prices and offers provided by retailer) - Price is equally important for both grocery
and apparel however while price is the most important factor for grocery, it is not the most
important factor in case of apparel.
apparel.
Service (Response time, Home Delivery, Payment Options, Auxiliary Services etc) - Similar
purchase decisions in both grocery and apparel but not as important as product assortment and
price.
External Environment (Parking facilities, Location etc) - Factors like parking etc were
important in case of grocery stores while location and ambience was an important factor for
apparel shopping.
Competitiveness Index
Price is found to be the most important competitive factor in case of retail (Table 1), comprising of
a quarter of competitiveness, followed by assortment and proximity. Interestingly infrastructure,
relationship and external environment are equally important with communication being the least
important. Four factors- price, assortment, proximity and service account for more than 75% of the
competitiveness of a Grocery store.
Price and Assortment are found to be the most important competitive factor in case of apparel
stores, comprising of a nearly half of competitiveness. Interestingly service, relationship and
external environment are equally important with communication and proximity (unlike Grocery)
being the least important.
Grocery Store
Table 1 Grocery Store- Pair wise analysis
Proxi
Assort
Infrastruc
Pri
Communi
Servic
Relatio
Ext.
mity
ment
ture
ce
cation
nship
Envi
ron
Proximity
Proximity
Pri
Proximity
ce
Assortment
Assort
Pri
Proxi
mity
Assort
Assort
ce
Infrastructu
Pri
re
ce
Prox.
Prox
.
Assort
Ass
ort
Infra
Servic
e
Price
Price
Price
Price
Pric
e
Communica
Servic
Relatio
tion
Service
Service
Ext
Serv
ice
Relationshi
p
Ext.
Environ
Unit
Count
Normalized
Our Score
Proximity
Assortment
18%
Price
25%
Infrastructure
7%
Relationship
7%
External Environment
7%
Service
15%
Communication
3%
18%
Apparel Store
Table 2 Apparel- Pair wise Analysis
Proximity
Assortment
Infrastructure
Price
Communication
Service
Relationship
Ext.
Environ
Proximity
Assort
Assortment
Infra
Price
Assort
Infrastructure
Price
Communication
Service
Relationship
Ext. Environ
Price
Service
Relation
Ext
Assort
Assort
Assort
Assort
Infra
Service
Relation
Ext
Price
Price
Price
Price
Service
Relation
Ext
Unit
Normalized
Our Score
Proximity
4%
Assortment
23%
Price
23%
Infrastructure
7%
Relationship
13%
External Environment
13%
Service
13%
Communication
4%
4.
Count
QFD Analysis
To overcome this problem Kano Model was implemented in the QFD analysis. The Kano model
helped in gaining profound understanding of customer satisfaction. It divides product features into
the following three distinct categories, each of which affects customer satisfaction in a different
way:
Must-be Attributes Customers take them for granted when fulfilled. However, if the product
does not meet this basic need sufficiently, the customer may become very dissatisfied.
One Dimensional Attributes These attributes result in customer satisfaction when fulfilled
and dissatisfaction when not fulfilled. The better the attributes are, the better the customer likes
them.
Attractive Attributes - The absence of attractive attributes does not cause dissatisfaction,
because they are not expected by customers. However, strong achievement in these attributes
delights customers.
For finding the adjusted improvement ratio, the following formula was used:
IRadj = (IRo)1/k
where IRadj is the adjusted improvement ratio; IRo is the original improvement ratio and k is the
Kano parameter varying for different categories.
For the present analysis the following values of k were used:
Service Category
Value of k
Must-be Attributes
0.5
Attractive Attributes
The competitor analysis with the Kano Model implementation for Kirana and Apparel stores is
provided in Figure 1 of the exhibits given in the paper.
For small grocery stores the following technical issues came out to be the most relevant:
Strategic Location
Quality Guarantees
For small grocery stores the following technical issues came out to be the most relevant:
Service Time
Strategic Location
Retail Schemes
10
11
12
Several alternate methods have been provided to allocate and arrange products. Corstjens & Doyle,
1981 (9) introduced the idea of cross elasticity that measures the effect of demand of one product
over others, for example, the effect of demand of soaps over face wash or effect of demand of tshirt over shirts. Though this factor did help in optimizing the profit further but on the level of a
small store the increment in overall profit (that is the objective statement in all optimizing models)
is not significant when compared to the amount of complexity involved. Moreover the study also
suggested that the factor used for sorting products (profitability, demand, size etc) were not as
important as compared to a sorted arrangement itself as these different factors optimized the profit
almost to the same value over the existing values.
Abbreveations
di = Demand for product i over average demand Di
pi = Profit per unit of product i
13
Z = max di (pi + i)
(Profit function)
where:
i = pj ij
ij = (ij - ij)/di
note that: di = (i + ij + ij + ji)
Such That:
1. si di s where s = S - si Di
2. ci di c where c = C - ci Di
Constraint)
3. 0 di Di i
Constraint)
(Space Constraint)
(Cost
(Demand
2.
Customer purchases product i and complementarily purchases j. Let the number of such
purchase be ij
3.
Customer purchases product i and alternatively drops purchasing j. Let the number of such
purchase be ij
4.
Customer purchases product j and complementarily purchases i. The number of such purchase
is ji
5.
Customer purchases product j and alternatively drops purchasing i. The number of such
purchase is ji
6.
14
15
Step 5: Place the products of high posetive cross elasticity together, while high negative cross
elasicities distant from each other, with the products of the highest order in Step 2 getting placed at
the spaces most visible to the customer.
Figure 4 shows in a flow chart form the steps required in applying the proposed heuristic algonthm.
16
If x is the average profit per product category, then thumb rule of ABC analysis suggests, items
with more than 6x profit are A class items.
Bathing Soaps
Flour
Biscuit
Toothpaste
Beverages
Rice
Snacks
Pulses
Parameter Estimation
The next step involved is estimation of parameters enlisted in the model for each of these product
categories. As mentioned earlier, no records were kept by the store owner, thus estimation of
parameters required other tools for attaining realistic values. For data collection we recorded
optimistic, pessimistic and most likely values of the demand Di and then calculated the expected
value using the following formula where a= optimistic value; b= pessimistic value and m= most
likely value
E= 1/3{2m+(a+b)/2}
Demand Elasticity i was estimated as i= Optimistic Di/Expected Value Di. Table 3 shows the
estimated value of parameters.
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An analysis of buying pattern was carried, monitoring the buying behavior for some highly and
slightly correlated products and these values were assigned to each of the ratings.
0 is assigned a value 0
i = pj ij
Table 4 shows the estimation of cross elasticity of products chosen.
Very rigorous values are not needed for this parameter as they only account for the hidden costs of
the company, and thus it is the relative value of the parameter that is more significant than the
absolute values. Table 5 provides the final data table.
1
2
3
4
5
6
7
8
9
S.No
Optimistic
Di (units)
Soaps- Lux
350
450
400
400
0.125
Soaps- Rin
270
330
300
300
0.1
Toothpaste- Colgate
225
275
250
250
0.1
Rice- 1 kg
180
220
200
200
0.1
Pulses- 1 kg
135
165
150
150
0.1
Flour- 1 kg
360
440
400
400
0.1
Biscuit
400
600
500
500
0.2
Beverages- Pepsi
500
800
600
616.6667
0.297297
400
750
600
591.6667
0.267606
Product
1
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Expected
Di
(units)
Pessimistic
Di (units)
1
2
3
4
5
6
Soaps- Lux
Soaps- Rin
Toothpaste- Colgate
Rice- 1 kg
Pulses- 1 kg
Flour- 1 kg
Biscuit
8
9
Beverages- Pepsi
Snacks-Lays (70gm)
+
+
0
0
0
Most Likely
Di (units)
0
0
0
0
0
0
0
0
0
0
0
0
+
-
8
0
0
0
0
0
0
9
0
0
0
0
0
0
++
++
i
1.81
0.56
0.56
2.44
2.44
3.00
0.13
1.50
0.25
The second method is distributing the whole capital left based on the proportionate demand
elasticity.
It is evident that there is an improvement in profits by 10-20 % by the use of the model based on
the existing heuristic methods available. The heuristic model proposed here achieves a similar
profit as the simplex model. The heuristic thus provides a thumb rule for solving the retailers
problem.
Table 6 Results obtained by Mathematical Model
No. of units
Cost
Profit
(Simplex)
(Rs.)
(Rs.)
19
Space
(cm3)
Soaps- Lux
50
1137.5
112.5
15000
Soaps- Rin
Toothpaste- Colgate
Rice- 1 kg
20
680
120
26000
Pulses- 1 kg
15
660
90
18000
Flour- 1 kg
40
1250
150
80000
Biscuit
100
1300
200
25000
43
2000
5070.5
675.5
166000
Space
(cm3)
Soaps- Lux
50
1137.5
112.5
15000
Soaps- Rin
190.75
19.25
2100
Toothpaste- Colgate
25
1137.5
112.5
6250
Rice- 1 kg
20
680
120
26000
Pulses- 1 kg
15
660
90
18000
Flour- 1 kg
40
1250
150
80000
Biscuit
5055.75
604.25
147350
Soaps- Lux
20
455
45
6000
Soaps- Rin
14
381.5
38.5
4200
Toothpaste- Colgate
364
36
2000
Rice- 1 kg
11
374
66
14300
Pulses- 1 kg
352
48
9600
Flour- 1 kg
12
375
45
24000
Biscuit
57
741
114
14250
51
1096.5
76.5
51000
51
918
102
102000
5057
571
227350
20
Space
(cm3)
Soaps- Lux
50
1137.5
112.5
15000
Soaps- Rin
Toothpaste- Colgate
Rice- 1 kg
20
680
120
26000
Pulses- 1 kg
15
660
90
18000
Flour- 1 kg
40
1250
150
80000
Biscuit
100
1300
200
25000
43
2000
5070.5
675.5
166000
6.
Managerial Insights
The unorganized sector is a very diverse and complex area of study. Unlike the traditional areas of
application of Management Sciences, which are more structured and organized, the study of
unorganized sector requires a very different approach owing to the complexities involved. Some of
the issues confronted during such a study include lack of necessary data, and much greater
diversity in organizations and processes.
A study of the unorganized sector can be undertaken; provided that a suitable selection of
analytical tools is done that can deal with the subjective as well as the quantitative information
involved. A major portion of such a study in unorganized sector involves creating a systematic
framework that can capture the diversity of the sector, given the constraints like non availability of
quantitative data, and can also provide for a platform for further analysis of its sub-parts. Quality
Function Deployment is a very powerful analytical tool that has the potential of great applications
in the area of unorganized sector. It at once analyzes the subject based on different parameters,
with respect to its different stakeholders. In this paper the House of Quality for unorganized
grocery and apparel stores has been developed. Further work in the area, employing the different
stages of QFD, can provide an interesting framework for further investigation in the area.
Another important aspect is simplicity of results, and development of effective thumb rules that
can be conveniently applied by managers of these unorganized sectors who generally would not be
comfortable with complex management science techniques, or unequipped for rigorous
mathematical optimizations. Development of such simplified applications can greatly improve the
competitiveness of unorganized sectors.
In the given paper, after contributing to the overall framework that can reflect the diverse aspects
of retail, we have proposed a heuristic to optimize the product assortment. The model introduces
the concept of linear cross elasticity, which is an area of further research in retail. If a database of
cross elasticity between different products can be created, based on a major statistical study, the
values can be of considerable significance to retailers while deciding their optimum product
assortment strategy. The optimization of product assortment is one of the many areas where further
research can be conducted in the context of unorganized retail, and these can provide for a creating
significant body of knowledge base that can greatly improve the competitiveness of unorganized
retail in India. The future work involves the validation of the model with further analysis of Kirana
and Apparel stores and comparing actual practices with model based approaches to estimate the
quantum of improvement using industrial engineering and O.R. approaches
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To conclude, the study of unorganized sector in general, and unorganized retail in specific provides
innovative challenges for researchers in the area of management, and work in this field can greatly
enhance the competitiveness of the sector and impact the growth in developing economies as a
whole.
References
1.
Boston Analytics. (2009, June). Traditional Retail Trade in India. Retrieved from Boston
2.
A.T. Kearney. (n.d.). The BRIC Promise. Retrieved from A.T. Kearney Web site:
www.atkearney.com
3.
CII - A.T. Kearney. (2006, November). Retail in India- Getting organized to drive growth.
Joseph, M., Soundararajan, N., Gupta, M., & Sahu, S. (2008). Impact of Organized Retailing
on the Unorganized Sector. New Delhi: Indian Council for Research on International Economic
Rela.
5.
Batt, P. J. (2008). Factors influencing the customer's choice of retail store. Perth, WA,
8.
Landa-Silva, D., Marikar, F., and Le, K. (2009). Heuristic approach for automated shelf space
allocation. In Proceedings of the 2009 ACM Symposium on Applied Computing, Honolulu, Hawaii.
9.
Corstjens, M., and Doyle, P. A model for optimizing retail space allocations. In Management
Authors Profile
Prof. Prem Vrat is former Director IIT Roorke and Former Vice Chancellor, UP Tech. University
and was Director in charge, Dy. Director, Dean and Head at IIT Delhi. Currently he is Professor
of Eminence, MDI, Gurgaon. He has published more than 390 research papers and articles in
journals and conference proceedings and has guided 36 Ph.D. theses. He is Honorary Member of IIIE
and Fellow of IIIE; INAE; NASI, ISTE, WAPS and has won many prizes and awards.
22
Prateek Raj is an Engineering Graduate from Indian Institute of Technology Delhi holding a B.Tech
Degree in Production and Industrial Engineering. His research interests lie in the study of
unorganized institutions of Developing Economies, which he considers is an area of potential
economic growth. The paper on Unorganized Retail is his attempt to understand the complex
dynamics of unorganized retailing using Industrial Engineering principles, is based on his major
project at IIT Delhi.
Akshay Jain is an Engineering Graduate from Indian Institute of Technology Delhi holding a
B.Tech degree in Production and Industrial Engineering. He is interested in the area of Operations
Research and Industrial Engineering and their applications in non--traditional areas of study. The
paper on Unorganized Retailing is based on his major project at IIT Delhi.
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