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ABM Assignment 2

RPG Spencer Case

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INTRODUCTION

Today, retailing doesn’t involve just dealing or marketing from shops, it includes analysing
the market in an effort to provide reasonable prices together with an array of options and
experience to customers. The sole purpose of all this is retaining the brand loyalty of
customers. Indian retail is currently a US$ 245 billion market and is anticipated to extend to
almost US$ 385 billion mark by the next five years1. The Indian retail sector is currently
sporting a brand new look and together with a 46.64 per cent three-year Compounded Annual
Growth Rate (CAGR), Conventional marketplaces are paving way for new shopping malls,
the likes of superstores, shopping plazas, supermarkets and brand label stores. International
style shopping centres have started dotting the skyline of cities and smaller towns,
acquainting the Indian customer to a unique shopping experience. The retail industry in India
is split up into the unorganized and organized retail segments.

RPG group is one of the oldest group in Indian organised retailing scene and was one of the
first to identify the potential of organised retailing when it entered into retail sector by
acquiring the Food world chain in 1996.RPG showed the future for the organised retailers by
bringing in a clean and amicable environment for selling fruits, vegetables and other grocery
items. Later on it partnered with Hong Kong based retail giant which scaled up the operations
of the food world very quickly to 90 stores. But still they remained concentrated to the
southern cities. However in 2005 both of them decide to separate in 2005.

RPG’s Spencer presently has more then 89 stores across 20 cities2 covering a retail trading
area of half a million square feet and with a clientele of 3 million customers a month.
Spencer's has a national footprint with seven hypermarkets, three supermarkets and 74 daily
use outlets, called Dailies.

All the newly opened Spencer's stores stock every conceivable product that is required by a
household on a daily basis. At Spencer's Daily shoppers can get fresh fruits, vegetables, fast-
moving consumer goods, household items, groceries, with regular offers and discounts.

Spencer's outlets are divided in to three retail formats. These are, Spencer's Hyper, the over
25,000-sq ft hypermarkets stocking over 25,000 items. The 8,000sq ft to 15,000-sq ft mini

1
India retail report survey 2007
2
The data pertains to the context of the case
hyper stores, branded as Spencer's Super and the daily purchase 4,000-sq ft to 7,000-sq ft
Spencer's Daily for groceries, fresh food, chilled and frozen products, bakery and weekly top
up shopping.

Given the context of the Spencer case many of the national and international giants are
making their foray into the rapidly growing Indiana retail industry which could be a threat to
Spencer existing business strategies. Again government has given indications of opening 100
percent FDI into the retail sector which could further adversely affect Spencer’s business.
Thus we would try to analyze the whole situation and the future strategic moves for Spencer
to gain further competitive advantage. We would also try to look into the existing supply
chain and the ways by which the efficiency of the supply chain could be increased to further
higher levels.

Supply Chain for Agri Retail in India:

India among the top producers of agricultural and farm products but the distribution system is
the least developed. Following are the problems with the distribution of the farm produces;
many intermediaries present in the value chain eats up the profit of the producers and make
the product costly, wastages during the transportation, lack of cold storages and
predominantly the wastages on the field during the harvesting and post harvesting, the
logistics management is still inefficient and the marketing channels are ill defined, all this
results in the repletion of chain with inefficiencies.

The supply chain also suffers from information asymmetry, lack of information regarding
market accessibility, pressure of consolidation forces the producers to make stupid decisions
on account of selection of the crop to be produced and how much it should be priced? All
these result in high prices along with poor quality of the produce. The economies of scale and
scope are not achieved due to small land holdings of Indian farmers.

The distribution activities are infested by government regulations, this system incorporates
some more intermediaries in the supply chain resulting in more insufficiency, farmers suffer
from red tapism and thus problems in the smooth movement and sale of produce.

The practices followed in the government regulated APMC mandis also acts like a parasite
for the producers, the farmers are compelled to take throw away prices for their produce due
to the red tapism in the system. Thus the intermediary operating in the mandi has more
bargaining power as he manipulates with the farmer and with the next intermediary in the
chain as well.

Reasons for poor price realization:

 Absence of multiple outlets for sale


 Lack of price transparency at the rural market yards
 Distress selling due to lack of cold storage facilities

Price difference:

Farmer sell NEGATIVE CONS


@ X rs/kg EXTERNALI BUY@
TIESS 1.58X rs/kg
Cumulative wastages due to inefficient supply chain is attributed to the following
factors:

 Multiple handling of products


 Poor packaging
 Lack of transportation and cold storage facilities
Traditional supply chain:

FARMER
X rs/kg

INTERMEDI
ARY 5-10%

WHOLESEL
LER 6-8%

RETAILER
8-10%

CONSUME
R

1.5 X rs/kg

Thus the farmers were paid a small sum in lieu of their produce and the intermediaries used
to siphon the profit which was intended for the producer. If the farmer was paid an amount of
X rs per kg then the customer was supposed to pay 1.5X rs per kg for the same product as the
rest of the money was eaten up by the intermediaries.
Supply chain elements of RPG Spencer:

Minimum Suppliers:

Keeping a minimum number of suppliers results in achieving economies of scale in both


purchase and supply transportation as the firm don’t have to spend in procuring and
transporting from different locations and producers. Vendor management is very efficient and
efficacious when there are a small number of suppliers as the overheads are low and the
control mechanism is very much applicable.

Creation of regional hubs:

Regional hubs developed at Bangalore, Chennai and Hyderabad facilitated in central


distribution to the state requirements and that upto 90% of the total business; it means a very
efficient supply logistics. Due to the development of these hubs the transfer of information
about the inventory was very accurate and useful too.

Replenishment Frequency:

The desired servicing of stores from the warehouses was daily, while the supply of any
specific SKU was twice a week. The desired ordering and servicing frequency from suppliers
to the warehouses was weekly.

Sourcing with minimum intermediaries:

Reduction in the number of intermediaries means that the firm can achieve or procure at low
prices and thus low cost leadership can be achieved in that segment. Low procurement costs
mean reduction in losses and increase in margins for the company. The company would be
responsible for the procurement from the wholesale markets, sorting, grading, transportation,
pricing and in store merchandising of the food items.

Problems in the chain:

Wholesale markets don’t realize SPENCER as a very big player, the market was controlled
by the wholesalers and they were not recognizing the potential of this firm. The low
procurement of the firm in the initial period even lowered the bargaining power of the firm.
Thus SPENCER changed the tactics and employed SOURCING AGENTS for procurement
from the wholesale market and handling the merchandising in house. These agents were well
versed with the market and the business as they were well qualified and experienced in that
field.

Due to the introduction of these agents the dependence of the firm on the local vendors has
greatly reduced, now SPENCER was deciding; what is to be sold, how it is to be sold, at what
price it is to be sold and to whom it is to be sold?

The main problem with this system was that even after having the experience of the
wholesale market, the sourcing agents were paying 350% of the prices what the wholesaler
was paying to the farmer. This means if the company procures directly from the farmer, a
large amount of money would be saved. Even the quality of the produce was not very good
and the farmers were incurring huge losses due to the wholesaler’s infestation.

WIN-WIN SUPPLY CHAIN STRATEGY:

The company will procure directly from the farmers, thus the farmers will be getting 100%
more prices what the wholesalers used to pay. The firm was also able to reduce the cost by
150% without compromising with the quality and size of the produce.

VISITS
SALES TEAM, SPECIFICATIN OF
QUALITY, QUANTITY, SIZE AND FARME
DELIVERY DATES R

DEVELOPMENT SUPPLIES
CENTRES POVIDE TRUCKS ARE POVIDED BY
TECHNICAL SPENCER
KNOWLEDGE

DIRECT CONSOLIDATION
CENTRE (DISTRIBUTION
CENTRE), FRAGMENTED AND
MULTILAYERED SUPPLY CHAIN

IF DIRECT CONSOLIDATION CENTRE


CAN’T MEET DEMAND

STAND BY TEAM BUYS


FROM WHOLESALE OR
SOURCE MARKET
DIFFERENT SUPPLY CHAIN STRUCTURES IN OPERATION:

Branded products:

 SUPPLIER...................CFA...............DISTRIBUTOR...............W/H........................ST
ORE
 SUPPLIER...................CFA.........................................................W/H.......................ST
ORE

Non branded staples:

 SUPPLIER.................REPACK
SECTION..................................W/H......................STORE

Fruits and vegetables:

 SUPPLIER.................CONSOLIDATIN
POINT.......................................................STORE

Bakery, dairy, some fruits and vegetables:

 SUPPLIER..................................................................................................................ST
ORE

Future Strategy

Retailing in its traditional form has been existing in India for decades. But retail management
in the true sense (as retailing is known in the west) is a relatively new discipline in India. In
Spencer’s case the supply chain strategy it has been following is “imitable” to some extent
and it could come as threat for its future business. Many of the national and international
retail giants with deep pockets like Reliance, Bharti, Wal mart are rapidly entering into the
retail foray scene. Hence given the context of the case it becomes imperative that the RPG
Spencer group come up with some innovative strategy to get competitive advantage over the
other organized retailers who are rapidly scaling up their operations .Moreover Spencer will
have to make its supply chain strategy more viable and efficient to get maximum utilization
of the available resources.

Creating high barriers to entry:

Spencer should try to create high barriers to entry for the new arrivals. This could be done by
strengthening the existing Spencer domain area of southern cities wherein they could
strengthen the existing backward and the forward linkages.
Low price strategy

The Indian consumer being value-conscious, a key to success for many retailers is the ability
to attract customers by offering low price guarantee. Spencer already has mastered the skill of
lowering the final price of the food products reaching to the final customers by cutting down
the intermediaries between the farms (point of origin) to the final consumer(point of sale).It
should further concentrate upon making the supply chain more efficient by contract farming
apart from continuing with contract growing. Further we see cases that the a large number of
the farmers grew the same crop in a season which flooded the market with quantity of crops
that created a “ demand supply” mismatch. However the concept development center has
been tackling with this problem but its high time for the Spencers to scale up the operations
to maintain the “non –uniformity” of the crops.

a) The company should adapt to aggressive sales, discount and collection schemes (say,
credit facilities.) and thus keep the enthusiasm going on as the Big bazaar’s Kishore
Biyani has been doing in all its stores. Spencer should try apply the “Chaos theory” in
its food world chain so that the customers get a real experience of bargaining in the
market.
b) One of the strategies could be of exploiting the existing distribution network already
established and expand further in urban centres. With rising real estate prices,
consolidation in the organised retail industry is going to happen in the medium/long
run. This network could then become the crucial differentiating strength.

IT Based Supply chain model

Spencer should try to go the e-choupal3 way using information technology (IT) in developing
a supply chain and integrating all the retailing processes from procurement to after sales. This
would help in making the supply chain more efficient and will cut a lot of transaction cost for
the Spencer although the initial cost or investment for making an IT based supply chain could
be high. Here the vantage point for Spencer will be that it can directly procure the fresh
vegetables and crops from the farms with farmers getting an option to know the current
market price or better price discovery. Hence the farmers could accordingly choose the best
price at which they want to sell their produce. Moreover the retail counters could get

3
E-choupals is one of the most successful ventures of ITC wherein it has integrated the whole supply chain
based on IT applications(virtual vertical integration).All the villages have choupals or kiosks equipped with
modern IT applications for immediate price discovery and related information.
“instant” access to the available stock, required stock sorting out the problem of the stock
outs.

Again there were instances of non uniformity in the farmers production leading to over
supply which was a loss both to Spencer and the farmers. This could be overcomed as the
farmers will get instant updates on the demand for the various crops and accordingly they
could grow the crops. Spencer could also allocate the amount and the vegetables or crop to be
grown in a particular season by a farmers. This would hep in avoiding the overlapping during
a season.

Data in Exibhit IV clearly shows that the level of IT usage by the Indian retailers is still at a
very nascent stage.

Advanced Planning and Scheduling Systems

APS systems can provide improved control across the supply chain, all the way from raw
material suppliers right through to the retail shelf. These APS packages complement existing
(but often limited) ERP packages. Spencer will have to resort to such modern system and
practices so as to compete with the deep pocketed big retail players in the market which
spend heavily in technology to scale up operations. They enable consolidation of activities
such as long term budgeting, monthly forecasting, weekly factory scheduling and daily
distribution scheduling into one overall planning process using a single set of data
Strategic Decision Support Systems

 Store Site Location

Demographics and buying patterns of residents of an area can be used to compare various
possible sites for opening new stores. Today, software packages are helping retailers not only
in their location decisions but in decisions regarding store sizing and floor-spaces as well.

 Visual Merchandising

Spencer stores should start focusing on the visual merchandising aspect because most
of the modern retail formats like big bazaar have been successful because of diligently
designed visual merchandising. Spencer should come up with an strategy to localize
the visibility according to the taste of the common Indian consumer. The decision on
how to place & stack items in a store is no more taken on the gut feel of the store
manager. A larger number of visual merchandising tools are available to him to
evaluate the impact of his stacking options.

Store connectivity

Spencer should invest in building wide-area networks (WANs) and virtual private networks
(VPNs) to access information across various sites. With visibility into every resource, stores
will take advantage of up-to-the-minute data at the right time for increased strategic
flexibility and informed decision-making for managing inventory. RFID could be a new
option for spencers to further integrate the supply chain. RFID is widely regarded as the key
defining technology to hit the retail sector, RFID tags on each piece of merchandise will
enable Spencer to monitor their inventory at a more detailed level than ever before.
Executives will identify when problems occur by monitoring signal readers installed at key
junctures, such as loading docks, receiving points, distribution centers, backrooms and store
shelves. These readers in turn will be networked to a centralized monitoring system that
would give it information about current operations, allowing them to identify problems as
shop lifting, inventory management etc. This could be a key technology in making the
supply chain much more efficient for Spencer.

Expansion into small towns and rural centres (including the northern states)

Till date Spencers have remained concentrated to the southern metros and tier I cities. It is
high time for them to expand into the tier II and tier II towns so as to enhance their
penetration and tap the “untapped” market. The Associated Chamber of Commerce and
Industry (ASSOCHAM) 4has completed a study along with KPMG in which they have
discovered that Indian cities (tier-I and tier-II) hold strong potential to see opening of 300
new hypermarkets by 20115. Moreover, retailers planning to venture into smaller towns are
anticipated to increase their store space in the range of 25,000-30,000 Sq ft in high street
locations. However, the building of malls will remain confine to tier I & II cities in the
coming 3-5 years.

4
ASSOCHAM report on Indian retail
5
RNCOS, a leading market research firm, has said in its research report "Booming Retail Sector in India" that the
Indian organized retail industry has been growing at an annual growth rate of 20% for past few years, and is
giving fillip to mall construction activities to further expand chains of hypermarkets throughout the country. With
this growth rate, the organized retail market will mount to US$ 50 Billion by 2011
Minimisation of the distribution cost

While making its foray into the northern states it could be a situation when Spencer would
have to incur larger cost due to the existing hub and spoke system wherein the hub services
the requirement of the outlets thus leaving less scope for the outlets to be located far away.
Hence all the outlets are required to be in proximity to the hub too optimise the cost which
was a major reason behind not expanding into the northern states. Here Spencer could
leverage its existing network and could try to create an efficient centralised system which
caters to the demand and supply from various hubs but the whole process should be
centralised. That is spencers should come up with investment in the location specific hubs in
the northern states as well interconnected with central hub to monitor the cost overheads and
optimise the distribution cost.

Contract farming

Contract farming could be an alternate source to tackle the gain a competitive advantage over
the new arrivals in the market. This could be beneficial especially in the case of agri-produces
which have very short shelf-life. Moreover most of the retail outlets which have been
successful in India have been adopting the strategy of contract farming. Mc Donalds resorts
to contract farming so as to maintain stringent international quality norms along with tight
pricing. This gives them an added advantage to reach the middle class Indian consumer at
affordable prices.

Reducing Complexity and Brand Consolidation Strategy

Presently the Spencer operates in multiple retail formats which makes the identification
process quite complex for a specific brand of Spencer. In present context Spencer has five
brands namely super, daily, fresh, hyper and express. This strategy of operating in multiple
brand formats seems to create a lot of confusion in consumers mind specifically an Indian
consumer. Most of the big retail players like that Tatas are trying to make a transition by
consolidating their brands like Chrome, Tanishq, etc under one roof to gain economies of
scale and reduce the complexity of “brand recognition”. Spencer should adopt a strategy of
consolidating these brands if not all then al least it should focus on bringing in some of its
brands like super and hypermarkets under one roof.
Product diversification and product mix:

Spencer’s strategy should be to come up with a right product mix that is location specific. It
should categorise the products into low value (high turnover) and high value (low turnover)
products. Hence the design of the Spencer shelf should be such that the low turnover items
are strategically placed so that it would attract the consumers attraction and the high turnover
products like flour, cereals etc already have high demand hence they will continue selling
even if they are not window displayed. Again product diversion would give the established
Spencer customers a larger set of options.

Employee selection, training and other HR issue

High attrition rates and low employee motivation in the retail industry could be an issue of
concern for Spencer to expand into the northern states and in the untapped rural centers. The
importance of employee selection and training cannot be overstated. Many retailers are
surprised to learn that monetary compensation, although important to employees, is usually
not their most important concern. Fairness, security, honesty, and opportunity are often more
important than pay. As many of the reports suggests that the retail sector has been facing the
crunch of trained employees to meet the ever expanding demand .Hence Spencer should open
up more training centers to equip the new generation with the skills of retailing. Future group
by Mr. Biyani has already ventured into creating professionals for the retail industry but we
think it would be customized training to meet the needs of Pantaloon retail formats. Hence we
would recommend that Spencer should tie up with b- schools to train the youths in a way that
suits Spencer’s requirement (Customized training).

Advertising and promotion

Spencer should resort to strong promotion strategy so as to create brand consciousness in


consumers mind specifically when expanding its operation into the northern states and the
small towns. Advertising is a key element of the store's image in the minds of customers.
Advertising can be thought of as communicating with customers. The objective of Spencer
advertisement would be to stimulate the customer to want what the retailer has to offer, and
to persuade the customer to take action to satisfy the stimulated want or need. Spencer should
try to create goodwill for itself by promoting the benefits accrued to the farmers by its supply
chain strategy which would automatically lead to mouth to mouth spread of words.
Again Window displays can serve to attract customers, to show customers the kind of
merchandise the store carries, and to project the image of the store. Because window
displays are so visible, they should be given the attention, care, and creative input they
deserve. Interior displays can be informative, can stimulate impulse buying, or can suggest
uses of a product. In addition, they can enhance the store's image. Other sales promotion
strategies include special events, sales, coupons, and trading stamps should be adopted by
Spencer to gain a competitive advantage

Services

The “ chaos theory” given in the reference materials is a perfect example of how biyani
designed his retail formats to target the specific customer segment. Retail formats like Big
bazaar target the middle class Indian consumer which is one of the major reason behind their
success. Moreover they were able to create the same situation as in the general Indian
markets which attracted the customers and gave them chances of bargaining. Moreover lower
prices attract the customers to the store. An enlightened retailer realizes that the customer is
the pivot around which all retailing activities revolve. This attitude is expressed to the
customer through shopping conveniences, services, employee attitudes, and fair values. As
part of the retail business plan, decisions must be made about the types of services to be
offered. Services, and handling of credit policies and customer complaints, deserve the
ongoing attention of the manager

Hence Spencer should define the target segment for each of its retail formats so that the high
and low end consumers could be served differentially through its different premium and non
premium retail formats.

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