Strategic Shoppers & their effect on retail inventory management and variable pricing
by Deepak Sharma on Monday, June 04, 2007
Knowledge@Wharton is running an article on how retailers need to focus on Strategic Shoppers to reap the full benefits of lean retail inventory management and variable pricing.
Some shoppers just can't help themselves and buy mostly on impulse without regard to price. Others are die-hard bargain hunters, who only open their wallets for a discount.
Then there are the strategic consumers, who are willing to buy full-price sometimes, but at other times they will wait for a bargain. According to new Wharton research, it's these customers that retailers need to focus on in order to reap the full benefits of lean retail inventory management and variable pricing.
In a paper titled, "Purchasing, Pricing and Quick Response in the Presence of Strategic Consumers," Gérard P. Cachon, professor of operations and information management at Wharton, and doctoral student Robert Swinney show how lean inventory systems are far more effective than initially thought in helping retailers determine the ideal size of their orders and the best markdown strategies when taking strategic buyers into account.
"The consumers are thinking 'Should I buy it now or later?' They form expectations about how likely it is the item will be around and how big the markdown will be," says Cachon. "If a strategic consumer concludes the markdown will be big and available, they will wait. There is an interaction between retailers and consumers when it comes to deciding on pricing and quantity.... They are playing a game."
The research shows that when strategic consumers are factored into a theoretical model, lean inventory -- or so-called "quick response" -- systems are, on average, 67% more profitable.
Download the Research Paper here.
AMR Research released its annual Supply Chain Top 25 report. The report identifies the top 25 manufacturers and retailers that exhibit superior supply chain capabilities and performance. The companies in this report demonstrate excellence across basic metrics related to execution -- return on assets, revenue growth, and inventory turns -- and are recognized by their peers and AMR Research as supply chain leaders.
Kevin O’Marah, Senior Vice President for AMR Research defines what is meant by Supply Chain Management while coming up with this report.
Our definition of SCM is broad, including not just supply management functions like sourcing, logistics, and manufacturing, but also demand management functions like forecasting, pricing, and service as well as product management functions like new product launch and innovation. Some call this broader definition Value Chain, which is in fact the name of AMR Research’s Advisory Service offered to clients looking for research, expert advice, and peer networking around these topics. The AMR Research Top 25 calls out companies that are leading in this area.
Imagine walking into a retail store and, with the swipe of a card, receiving a printout that includes a personalized shopping list, relevant coupons, notice of associated store discounts or sales, and even a map to where the items can be found in the store. HP recently showed off the Retail Store Assistant, an experimental system designed to enhance the consumer shopping experience and improve efficiency for retailers by bringing the power of online access to brick-and-mortar stores.
Developed by HP Labs, the Retail Store Assistant includes an in-store kiosk, which customers can access with a loyalty card or by typing in their phone number, that is linked to a retailer’s IT system, which contains inventory, sales and customer purchase information.
By better connecting consumer and store data, the system works to the advantage of both customers and retailers. For example, if a grocery store detected that a customer bought yogurt every time it went on sale, it might offer that individual the sale price every time he or she went to the store. Or, if the grocery store determined it had an excess inventory of onions, it might give shoppers a recipe for onion soup, note that onions were on sale and point out where to find them.
The personalization provided by the Retail Store Assistant makes for a better shopping experience and is key to closing what retailers call the “intention-action gap.”
“Instead of sending consumers advertising and coupons and hoping they’ll come in to buy, it’s better to reach them when they’re actually in the store – they’re more likely to make the purchase,” said Mohamed Dekhil, manager of retail applications in the Digital Imaging and Printing Lab at HP Labs, the company’s central research facility. “Besides, about 99 percent of all junk mail is thrown out because it doesn’t offer anything people want. The Retail Store Assistant provides consumers information only about things they really care about.”
Photographs below:
Stores Magazine has a very good interview with Andrew Levermore, CEO of Hypercity, a K Raheja Corp, Group subsidiary. Hypercity recently completed one year of operations in Mumbai and as per Levermore will post sales in excess of $30 million for the first 12 months of operation. Upon asked What’s the greatest retail lesson Hypercity learned during the first year, this is what Levermore replied.
"The most important in the Indian context is that we have a supply-creates-demand scenario here. We have introduced new categories of product that research indicated were not in demand. Mountain bikes are the classic case in point. In India, it was believed that a bicycle was a functional item used for transportation by the so-called “service class.”Other lessons that Hypercity learnt and I feel very relevant with Indian consumers being:
We are the exclusive retailers of Raleigh mountain bikes and have seen an immediate take-up by the young, aspirational customer, who has embraced it as an exciting way to keep fit and have fun. "
"The first surprise is that the store format [opens] with fruit and vegetables. It is traditional in the West to lead with your higher margin general merchandise and force the customer to traverse this product before getting to their daily or weekly purchase of perishables. In India, we compete against the road side vendor for fruit and vegetable sales. Forcing our housewife to walk 100 meters to the back of the store for the same would discourage many.Another thing to note is the use of Retail technology. Levermore says,
The second surprise is the amount of customer space we have created. Western retail tends to “sweat the space” and drive up trading densities by overloading the sales floors with product. An overwhelming majority of the more than 85,000 customer feedback forms list spaciousness as their No. 1 reason for returning. The consumer has rewarded us with a much higher transaction size and sales per square foot – 30 percent beyond our expectation.
The third surprise is our positioning of a hypermarket format targeted specifically at the upper-income consumer. Whilst the upper-income consumer is represented by just 10 percent of the [Indian] population, this is a staggering 120 million people. Although this is our specific target, our value statement is clearly stated and backed up by competitive pricing. "
"We use the latest merchandise management platform from JDA. Together with the sophistication of the E3 auto-replenishment system and the Intactix space-planning software, we are fairly well equipped to manage our inventories. At point of sale, 360-degree scanners manage the customer checkout."
Dell has plans to start selling Personal Computers at 3500 Wal-Mart stores across US and Canada. While this could be first such initative with the company, looks like Dell has a strategy to partner with other big retailers also like Circuit City, Best Buy etc. Why is Dell doing this? Apparently direct sales model via the Internet, mail or phone orders is not working enough. Dell was missing out on consumers who make atleast once a week trip to Wal-Mart and can see an actual computer in working and if decided buy it right away from the store and not keep waiting for it to ship as is the case with Internet purchases. This will surely impact Dell's margins as selling via a retailer will always be less (some part will go to Wal-Mart). Also, Wal-Mart is known to place extraordinary pricing demands on its partners. It will be interesting to see how Dell copes up with that. This partnership plays well with Wal-Mart's plan to expand its selection of electronic products.
It has been some time since I blogged on this blog. More because of a change in priorities and less time on my hand. While I want to improve on my time management skills (as always), I wanted to assure all of you that there will be more focus to the blog. I have changed the blog template a bit (courtesy: Free CSS Templates). Hope it will be liked by all.
I belive Retail as a sector is growing leaps and bounds and technology is playing an ever increasing role in giving more power and choice to consumers. In this second innings of blogging here, apart from technology applications in Retail sector, I would be focusing a little bit more on the Retail revolution in India. If anything in India is moving at this time, it is IT and Retail. Stay tuned.
CBS News Reports, the holiday season might not be so jolly for shoppers returning presents. Some major retailers are cracking down on repeat returns and changing their policies, too.
Retailers say fraud involving returns costs stores $16 billion dollars a year, so more and more chains are fighting back with policies and practices that make it tougher to return things.
They're shortening the time you have to return items after they're bought, hitting customers with hefty "restocking fees" on returned items, and cracking down on "serial returners" with new, sophisticated computer tracking equipment.
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This fall, Sears began imposing a restocking fee of 15 percent of the purchase price on all electronics products that are returned after they've been used, or with missing parts or manuals. And while they give you 90 days to return other products, you now have only 30 days to return electronics items.
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Many major retailers are even using hi-tech computer systems that track every return you make, and put a red flag on serial returners.
For instance, Wal-Mart has a system that automatically flags customers who try to return more than 3 items without receipts in a 45 day period. If you surpass that limit, they won't accept your returns. If you don't make any returns without a receipt within a six month period, the red flag goes away.
Check out the roundup on the Indian Retail Industry from the recently concluded India Economic Summit 2005. There are interesting observations and concerns on FDI in retail sector from the who's who of the Indian retail industry.
Co-Chair Sanjiv Goenka, Vice-Chairman, RPG Enterprises, India, said that retailing accounts for approximately 10% of India’s GDP and employs more people than any other industry. The challenges for achieving critical mass and generating employment in the retail industry relate to the integration of small and large retail, the integration of rural and urban markets and the integration of supply chains for a unified market. The issue is foreign direct investment (FDI) in retail; there are concerns that it will create monopolies. Demand impetus should be created through a single market and uniform taxes.
Kishore Biyani, Managing Director, Pantaloon, India, said that FDI has to enter the retail sector sooner or later. India is the last leg of the large consumer base and retail is the last leg of any business value chain. However, he stated that FDI in retail should be delayed. India is giving away a Rs 300 billion market for US$ 1 billon of FDI.
B. S. Nagesh, Managing Director and Chief Executive Officer, Shoppers Stop, India, felt the issue of foreign retailers is being confused with FDI. If foreign brands are allowed to manufacture in India, they should also be allowed to retail. The consumer has to be given a choice of goods.
Hans-Joachim Koerber, Chief Executive Officer, Metro, Germany, a Co-Chair of the India Economic Summit 2005, said investments are needed in the supply chain. Almost all developing countries have allowed FDI in retail in a controlled way. Retailing is a technology-based business. India can wait until Indian retailers wake up or allow the nation’s retailers to benefit from the experience of other countries. A foreign retailer that has local staff does business in a country, for a country, he emphasized.
Suhel Seth, Chief Executive Officer, Equus Red Cell, India, said FDI is not about patriotism but about serious consumer issues. Indian retailers are waiting for better value. If retail prices go down, consumer spending will be spurred, and it is then irrelevant where the money comes from. From a marketing perspective, retail will give consumers more choice and allow local brands to develop.
Jean-Paul Thill, Chief Executive Officer, EMA Region, KPMG, France, said it does not matter where FDI comes from. India’s modernization is inevitable. It has a very vibrant IT sector, while it trails in retail. A mix of investment in cold storage and supply chains is needed.
Samir Modi, Managing Director, Modi Enterprises, India, said the concern is whether India wants organized retail or not. Taxes are too high and too many authorizations are required. Making organized retail easy is what is needed today. Multinational corporations offer margins of 9-11%, which is considered absurd in international markets. Levelling the playing field for the organized and unorganized markets will resolve the FDI question.
Abhiram Seth, Executive Director, Exports and External Affairs, PepsiCo India Holdings, India, said there is no incentive for quality products, especially for farmers. The impact of pricing on farm incomes is high. A 50-paise difference per kilogramme makes a difference of Rs 10,000 per acre of crop for the farmer. An aggregated model to provide better returns to the farmer and better value to the consumer is necessary.
Ajay Dua, Secretary, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, India, said the issue in retail is not limited to FDI. Retail in India represents 11% of the GDP, with a market size of Rs 300 billion, a much larger percentage than in most countries. India has a national policy on manufacturing, agriculture and tourism. Therefore, a national policy on marketing is now needed. There are, however, numerous alternatives with considerable differentiation – wholesale vs retail, rural vs urban, lifestyle goods vs basic goods, etc. Within these lies the issue of organized vs unorganized marketing. Organized marketing has not eliminated unorganized marketing anywhere in the world; the two have to coexist. Organized marketing in India is growing at 18-20% and has given a boost to real estate. It has, however, not helped rural marketing, supply chains, consumption and purchases by tourists. Malls have not started selling ethnic goods either. Some employment has probably been generated. A macro perspective on marketing is needed. Making a policy based on conjecture would lead to improvisation.
A newly published study finds that apparel and footwear retailers can expect a quick and significant return on investment from deploying RFID at the item level.
RFID Journal
Convenience Store News reports:
Pay By Touch and NCR Corp. are combining their hardware and software solutions to offer retailers a single point of contact for supporting their entire merchant and consumer biometric needs.
"Consumer demands for convenience are growing at an unprecedented pace, and retailers of all sizes need a fast, simple and secure solution that provides the ultimate customer service," said Stephen Reade, senior vice president of product of Pay By Touch. "Our alliance with NCR addresses these needs with a fully integrated solution that improves the checkout experience -- and merchants’ top and bottom lines -- while also positioning our services for expansion into other vertical markets."
Using NCR’s biometric-enabled point-of-sale solutions, retailers can use the Pay By Touch authentication and payment service, providing shoppers a convenient and secure way to pay for goods with the touch of a finger.
