Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Retail: Cost vigilance throughout - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 26, 2009

    Retail: Cost vigilance throughout

    In our previous articles we highlighted the issues faced by the retailers and the operational issues that impacts their ability to sustain and/or improve profitability.

    In this article we will take a look at the parameters whereby a re-evaluation may cushion their margins and boost growth.

    Cost checking: Costs should not only be monitored when margins start shrinking during a downturn. It should be an exercise practiced right from the beginning and on a continuous basis.

    In the recent past, Pantaloon had come out with a slogan "Garv se bolo hum kanjoos hain" to rationalise cost cutting. The idea was to understand the need to contain costs and eliminate inefficiencies. The move ensured that internal overlapping of functions was avoided as human resources and information technology was integrated. With this campaign, the company aimed to save Rs 1.7 bn (US$ 36.5 m) over a one year period. Cost control measures were initiated only in 2008, in anticipation of the slowdown witnessed in FY09. Although the move worked in favour of the company, we believe it should be an ongoing activity.

    How can retailers keep check on costs right from the beginning? For that, they need to identify the areas where costs need to be checked regularly such as pilferage, handling, theft, overlapping of functions, excess floor staff etc. and accordingly need to re-align functions and responsibilities. For instance: To lower cost, business risk etc., retailers can enter into arrangements with vendors in various business formats such as Consignment & Concessionaire/Conducting arrangement. How does it benefit? Costs related to merchandise received under consignment and concessionaire arrangements belong to the consignors / concessionaires such as inventory, staff etc. The cost of sales and sales value can only be recorded by the retailer in profit and loss account.

    Optimize resources and improve labour productivity: One way to optimize resources is to centralize some of its operations like distribution, and back-office operations, as well as resize stores (store count as well as size of stores). Retailers are going slow on hiring back end staff or have linked compensation to performance in order to improve labour productivity.

    Inventory management:For this, the retailer first needs to understand the local customer and accordingly stock products. The retailer should always maintain sufficient inventory to cater to the needs of the people. It should not be a case of excess or deficit. To ensure this, the retailer needs to conduct a proper market research towards understanding the needs and frequency of the purchases of the residents. Market research will help retailer to get a judgment regarding purchase patterns and accordingly help him to stock offerings but real understanding will take place as store becomes operational. According to the response they receive, they need to streamline their inventory, as bargain hunting may result in overstocking and this will increase their inventory cost if found unable to sell it.

    Nowadays, the term inventory management or inventory control is not just restricted to purchases and sales but is also applicable to handling too. Here, store operations play a significant role as it involves a check on shrinkage. Shrinkage in the retail business is defined as the loss in inventory through a combination of shop lifting, pilferage, and errors in documentation. A well defined process for physical counting of inventory, digital surveillance, etc. can help reduce shrinkage ratio. In India shrinkage ratio is around 2.95 and highest in the world.

    Renegotiate rentals: Rentals constitute a greater portion of total costs. The average cost of rentals as a percentage of sales has been around 10% in the past 4 to 5 years. The rentals were on the higher side in 2008. However, in recent times, mall rentals have fallen up to 50% compared to their peak in FY08. This has enthused retailers to kick start their expansion plans. At the same time, they should also look to renegotiate rentals and bring down their overall costs. An alternative is the retailers adopting a revenue sharing model. In a revenue sharing model, a certain percentage of the sales are paid to the mall owner or developer. This works out as a win-win model.

    Re-evaluating store viability and expansion plans: Retailers need to analyze whether the store is a cash cow or a drag on the company's finances and accordingly take a call. There can be 4 situations.

      Low cost and high sales: Such a store is a profitable store. One should consider expansion of such stores, and invest time and money in such stores to further enhance volumes and profitability.

      Low cost and low sales: In this case, there is a scope for improvement as the costs are on a lower side. Cost factor is not the issue. One needs to boost sales. To achieve this, a retailer needs to increase footfalls by improving visibility of the store in the minds of the customer. Put more time and effort into understanding the issues concerning conversion (footfalls into cash memos), as lower footfalls may not be the only issue that needs to be tackled. To increase conversion ratio, train employees, ensure ambience and store display is good enough to attract customers, etc.

      High cost and high sale: In this case, volume sales are on a higher side. The store is able to find takers. What is required is cost rationalization. The cost of operation may be on a higher side owing to high rentals, high maintenance cost, which could be the result of wrong structure or design of the mall or retail outlet, needs to rationalize employee cost, etc. Check on costs may help improve profitability and viability of operations.

      High cost and low sales: Now, such a case is a clear indication of a drag on the overall business operations. A store which has high cost of operation and low sales needs reconsideration. Either the location is wrong or there is a mismatch in terms of offerings and target segment. Retailers should close such unviable ventures and shut the store. This is where market research plays importance, by identifying target segment and location.

    On a concluding note:

    Well planned and focused expansion plans will help the retailer minimize high cost issues or resolve the same. Retailers are currently testing markets and different formats. They had come out with different size of formats across categories. The retailers need to evaluate whether they understand the customers' requirements depending upon locality. The business model of value retailer and life style retailer is very different. Operations and working capital requirements are different. Again, the skills differ as per the category and the products served. The food business has a low shelf life and requires a regular supply of various products. It comes under 'value retailing', which is a low margin - high volume business. On the other hand an apparel retailer would be regulating a high margin - low volume business and would need to concentrate on parameters such as style and fashion, apart from quality factor.



    Equitymaster requests your view! Post a comment on "Retail: Cost vigilance throughout". Click here!


    More Views on News

    Titan: Jewellery Business Lights up the Quarter (Quarterly Results Update - Detailed)

    Aug 10, 2017

    However, growth at these levels are unlikely to be sustainable.

    Avenue Supermarts Ltd. (IPO)

    Mar 7, 2017

    Equitymaster analyses Initial Public Offering (IPO) of Avenue Supermarts Limited.

    Titan: Beating the Demonetisation Blues (Quarterly Results Update - Detailed)

    Feb 14, 2017

    Titan Industries declared its results for the third quarter of financial year 2017 (3QFY17). While topline growth was 14.7% YoY, net profit grew by 13.1% YoY during the quarter. Here is our analysis of the results.

    Titan: Margin Improvement Saves the Day (Quarterly Results Update - Detailed)

    Nov 16, 2016

    Titan Industries declared its results for the second quarter of financial year 2017 (2QFY17). While topline growth was flat, net profit grew by 23.5% YoY during the quarter. Here is our analysis of the results.

    Titan: High Gold Prices Spoil the Show (Quarterly Results Update - Detailed)

    Aug 9, 2016

    Titan Industries declared its results for the first quarter of financial year 2017 (1QFY17). The company reported 3.3% YoY increase in sales, while net profit fell by 16.3% YoY during the quarter.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms