Sales & Distribution Management

A study on the Sales & Distribution of Mens Apparel

Guru Govind Mishra Murali P. Pathak Piyush Pathneja Vibhu Mangla
BM-A (2010-12)

B10019 B10029 B10035 B10059

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 Indias 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 fteen years.

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CLASSIFICATION OF THE INDIAN RETAIL INDUSTRY

The traditional classification is as follows:

Retail

Food Retail

Clothes & Apparel

1. FOOD RETAIL

Supermarkets: 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 fulll 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 often frequented by individual consumers as well. Bharti-Walmart has begun its Cash and-Carry operations in Punjab.

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2. CLOTHING & APPAREL

National 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. prominent NCS Shoppers Stop is a

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, ne dining and entertainment arcades.

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

Retail Consumer Durables Electronics & Appliances Books & Music

Jewlery

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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 of around 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 apparel including 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. Average bill 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 of Levis 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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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:
Manufacturing Hub (Bangalore)

Regional Warehouse

C&F Agent

Exclusive Company Owned Outlet

Multi Brand Outlets

Modern Trade Outlets

Exclusive Franchisee Stores

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.:
Mens Apparel

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:
Cost of Stock-out

Place Utility

Brand vs. Store Decision

Service provided by competitor

Bargaining Power of outlet

Time Utility

Service to be provided by company

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
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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 such stores, 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 jeans irrespective 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: Uncertainty of untried brands

Decision Process

Place Utility

Time Utility

Variety Seeking

Low

Immediate purchase needed. Cannot wait for the Nearest multi-brand product. If at all outlet waiting is required, it would be for a very limited amount of time 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

Limited Problem Solving

High

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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: Involvement of the Format salesperson required during the decision process The salespersons in these exclusive stores are called fashion consultants. They generally assist the consumer by giving High tips to them throughout the process of trying out different product and help them choose the colour, size etc. which fits them right The salespersons in stores with few brands behave like salespersons of the High if very few brands are exclusive stores. However, if there are stocked. Low if many brands many brands stocked, they handle an are stocked individual counter and do not offer the consumer help through the entire process 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 Reason

Exclusive Store

Multi brand outlet

Modern Retail Outlet

Low

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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 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 If the store stocks very few brands, then the salesmen should adopt the new business selling strategy as mentioned in 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 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

Exclusive Store

Limited Problem Solving

Multi brand outlet

Variety seeking

Modern Retail Outlet

Variety Seeking

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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 a comfortable 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 with regards 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 concerned about 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 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.

Multi Brand Retail Outlet Satisfies the need of a customer who wishes to select the brand after comparing with various brands. Product intensity should be high.

Modern Retail Outlet

Customer buying situation

Satisfies the need of a customer who views shopping as a leisurely activity and purchases the product only if all the decision parameters are fully satisfied.

Type of locality

Located in a central Located in a posh, high Located on the commercial business end commercial area outskirts of the city area Promotional activity, Price, colour, size and the differentiation of the other product related brand from others, factors ambience Brand aware, but not very loyal to the brand Not very brand loyal High fashion products relevant to the latest trends are stocked along with fast moving products Low to average on service

Factors influencing Availability of choice of brand desired product Customer Patronage

Very loyal to the brand

Details of Stocks

Service Levels Required Profitability of retailer from the product category

Mens Apparel

A wide range of products is maintained, Only fast moving including both slow products are stocked and fast moving products High on service if very few brands are High on service stocked. Low in service is many brands are stocked High margins Relatively margins lesser

High 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 NDOS AUSPD PPU CC = = = = = Cost of a Stock out Number of days out of stock Average units sold per day Price per unit or profit per unit 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 stock out model as proposed in Stockout Cost Models Empirical Tests in a Retail Situation by C. K. Walter AND John R. Grabner

Source: http://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 product is 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

Parameter Exclusive Store (Levis) Multi Brand Outlet Modern Retail Outlet 25000 (For Average monthly footfall 1050 6000 Apparels approx. 2500) Average Bill Value Customer Lost due to stock out in a month Average Sales in a month Cost of stock out in a month Percentage of Sales Yearly Cost of Stock out 2000 30 1500000 60000 4 720000 1000 200 1200000 200000 16.67 2400000 1200 150 3000000 180000 6 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: Exclusive Company Owned Outlet Multi Brand Retail Outlet Modern Retail Outlet

Factor

Cost of stock out for the company

Cost of stock out is relatively low (approx. 4% of the monthly sales)

Cost of stock out is relatively high (approx. 17% of the monthly sales)

Cost of stock out is 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 Limited

High

Bargaining power of the company

High

Very Low

Fast moving products need to be amply Inventory to be A full range of products stocked. Slow moving maintained needs to be maintained ones can be given a miss Pull/display if very Suited for brands are push/pull /display Pull/display/information few stocked. Push if many /information etc. brands are stocked

Fast moving and high fashion products need to be amply 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.
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