Key to Future Growth: Making Modern Retail Profitable

One of the most dynamic and fast-paced market globally, India is the fifth largest destination for retail. Indian retail industry is experiencing exponential growth, with a healthy demand in the organized segment. As per IBEF, the Indian retail market is expected to reach $1.1 trillion by 2020. The overall size of modern retail is also expected to grow at 24 percent, twice the growth rate of overall retail market in India during this time. Riding the wave of the modern retail growth in a profitable way has always been a key challenge for retailers. 

The Market

 We often hear about retailers driving internal operational efficiencies like managing costs, efficient store management, leveraging IT & effective supply chain solutions to drive profitability. However, a little is written about retailers driving profitability through buying and merchandising collaboration with suppliers. In the FMCG categories, there is a huge scope for a greater partnership between suppliers & modern trade retailers, to drive two-way profitability by driving category growth. This calls for a paradigm shift in the relationship and the conversations between the two teams. Needless to say, this requires commitment right from the top management of both the organisations. 

 The journey towards two-way profitability needs to start with the in-depth understanding of the shoppers, which needs to be prepared and presented by the supplier - typically a category leader. This involves understanding of shopper demographics, shopping needs, shopping missions and shoppers’ purchase decision hierarchy (PDH) of the particular category for which both the supplier and retailer have partnered to drive two-way profitability. This PDH is one of the enablers apart from SKU’s velocity of sales and Gross margins to decide the right assortment for the given category. Often retailers end-up listing too many products in a category leading to not only slow-moving inventory but also reduced shelf space for some of the fast-moving lines - thereby creating frequent out of stocks - which is a lost sale. Hence, it is critical for the supplier to wear a category hat and make dispassionate decisions on arriving at the right assortment. This may at times lead to reduction of the total SKUs in the category including some of their own, but that’s the true test of genuine partnership & commitment to enhance the category growth.

 After the assortment exercise comes the most important part, which is arranging the category shelf. The right Planogram enables the retailer to merchandise the right product at the right place, enabling a better shopping experience. The PDH depicts the thought process of the shoppers for buying a particular category. Replication of this thought process on the shelves by arranging the assortment in a manner which complements PDH leads to better shopper conversion for the category and higher growth. Planogram is an evolved science and has many tools to facilitate the detailed layout by SKU, but the rule of thumb is that the fast-moving ones always occupy the eye level diamond location on the shelf.

Emerging opportunities

 While managing one of the FMCG food category for one of the biggest retailers in Southeast Asia, a 20 per cent reduction of assortment in the category helped us grow the category by 5 per cent ahead of the market growth. Hence, the right assortment displayed with a shopper friendly planogram often leads to better GMROI (gross margin returns on investment) for the retailer. 

 It has become vital to understand shopper needs, to arrive at the right price pack architecture (PPA) for the category. This detailed PPA study identifies the gaps and opportunities to fulfil the desired shopping needs. This study must be again led by the supplier. A classic example across Indian and South east Asian markets is evolution of the “Multipacks” in various FMCG food categories. A lot has changed, from a time when these pack formats did not exist at all, till today where they contribute anywhere between 20 to 30% to the category sales. It has helped fulfil a shopper need, improved the Average Bill Value for the category and increased the consumption in these impulse categories, leading to better & profitable category growth. 

 Conclusion

We have discussed the three crucial steps for getting the cash register ringing, however, the most critical aspect in this process is the partnership between the retailer and the manufacturer. It will be difficult to achieve these results unless both are on a joint mission to grow the category in the store. They need to be in alignment till the top echelons of management at both ends to reap the benefits of the partnership. The transformative relationship between the retailer and the manufacturer, will define the pace of category growth in the store, spelling out the success of modern retail format in future.

The article has been authored by  Unmesh Khambete, Director Sales, IPM India Wholesale Trading Pvt Ltd (IPM India)  

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