Improve cost performance

The Indian retail industry has been witnessing difficult times in the recent past. In such times, the foremost thought amongst most retail companies is how to address cost management. While actual cost profiles might be different across economies, the retail industry is fundamentally a low margin industry across the world. Therefore, it is important to have consistent focus on cost for the long term success of any retail company.

There are several reasons why cost management has been an issue with the Indian retail industry. For starters, most retail organisations and their staff did not have prior experience in retailing. As a result, the fundamental low cost business model was largely ignored. Today, Indian retailers are waking up to the fact that while the Indian consumer might be different, business models largely remain the same across the world with some variations. Another key issue impeding better recovery is the final product price which is governed by the maximum retail price (MRP) regime. Globally, retailers adopt price optimisation across stock keeping units (SKUs) and stores. Under this, they fix the selling price for products depending on their demand and offtake to optimise the pricing for better margins and better cost recovery. On the contrary, the MRP system in India does not allow the industry to fix higher prices and optimise returns. Therefore, the option of increasing margins largely revolves around cost and discount management rather than smart pricing strategies. Thirdly, a good sourcing strategy plays a key role in managing cost. Retailers not only need to procure products at the right price, but also need to sustain the cost advantage over time.  For most retail companies in India, there is no systematic analysis of procurement prices and trends. As a result, it is difficult to procure well and also sustain the process. The industry is also challenged with lack of scale and hence, with lower purchasing power.

The retail industry in India can look at some external, as well as internal strategies to manage cost. External cost management strategies would revolve around methods adopted by retailers to address challenges pertaining to the business environment and competition. Retailers could reduce costs through rationalisation of operations resulting in reduction of excess manpower and redundant process. This could be done by reorganising distribution channels, offices or departments. To cite an example, a leading retailer in the US is incorporating improved operational processes by merging marketing operations for its store, catalogue and online business in order to bring about greater efficiency.

Further, in-store partnerships are a smart way to get the most of each square foot of retail space. The in-store partner gets strategic access and assured footfalls, while the customer has access to more brands in the same retail store ensuring less time spent in multiple stores. The retailer can thus release less productive space to another brand/company. This is most evident in partnerships with branded fast food chains and complementary products.

Indian retailers have set up stores in several locations that probably do not have the necessary footfalls or pay lease rentals that do not fit into the retail business model. In difficult times, it is appropriate to review the need for such stores from a business and strategic perspective and consider store closures. Additionally, retailers should increase focus on trimming and adjusting inventory to manage costs and risk of markdowns. In a tough market, customers are not only expected to trade down but also buy less. It is apt for retailers to take a risk of lost sales rather than unsold inventories.

There are significant opportunities for Indian retailers to reduce cost through an internal assessment as well. Though companies should carry out internal cost management projects as a natural course of business, it requires a definite focus and top management involvement in the initial stages. It is important to understand the cost profile of a company. This would require a high level assessment of the key cost elements and how they have moved over time and why.

This process should not be limited to looking at numbers alone but should also include discussions with the operating staff. Often, people down-the-line are aware of the actual reasons for high cost and such interactions identify process costs incurred due to duplication and wastage.

Benchmarking company costs against the cost profile of competition often reveals interesting ideas on cost management. This is not easy, but is possible through external consultants, suppliers and industry contacts. Once the ideas are accepted and agreed upon, the management should be given the task of implementing these within a definite time frame and measurable output. This should form a part of the key result areas (KRAs) for relevant executives. There should be a strong monitoring process, preferably assisted through an external agent to remove bias and enable accurate progress reporting. 

Retailers need to fully comprehend the broad and long-term impact that cost reduction has on an entire organisation. ­­It’s possible to reduce costs rapidly, but the real success lies in sustaining efficiency through improved cost performance.