Optimizing Retail: Need of the Hour


Lalitya Vir Srivastava

Indian cities are witnessing a paradigm shift from traditional forms of retailing into a modern organized sector. Driven by changing lifestyles, strong income growth and favorable demographic patterns, Indian retail is expanding at a rapid pace (oracle.com/applications/retail/mp/space).

Aligning with the pace of growth & the changes in the demographic factors, the major challenge faced by the retail industry, is the availability & optimization of the floor space in the retail out let. As per Jones Lang LaSalle's third annual Retailer Sentiment Survey-Asia, Indian retail is expanding at a rapid pace. Mall space, from a meager one million square feet in 2002, is expected to touch 40 million square feet by end-2007 and an estimated 60 million square feet by end-2008 (oracle.com).

As  evident from reports, the demand in the retail sector for space has grown leaps & bound, the cost of per square feet floor space has also touched the peaks therefore  Retailers pay a high premium for retail space—and they need to determine the most effective and profitable use of that space (oracle.com). Thus the optimization of Retail operations becomes the prime focus for managers. Retail Space Optimization is about smarter space decisions to maximize revenues but is seen as the major constraint in the maximization of profit of a retail store.

The trade area analysis for a particular retail, especially for the new stores, gives the fairly good idea about the floor space required for the retail. The managers while deciding floor space requirement for a retail store, should critically examine the following factors:

1. Foot Fall of customer
2. Store location
3. product variety & display
4. Fixture, and item on-shelf allocation 
5. Product assortment (high & low profit)
6. Sales forecast ( slow & fast moving products)
7. inventory of assorted products
8. Forecasted demand from trade area
9. Profit potential for the retail.
10. Convenience of customers to reach to the product displays

As the availability of space is difficult and the cost of the floor space is high, Optimization of profits from retail outlets is possible with space allocation within a product category and across the entire store. Optimization focuses on right sizing categories, product assortments and inventories in the aisle, to enhance consumer satisfaction and maximize retail performance (oracle.com).

The optimization of profit for Retail outlet may be developed by taking the strategic decisions on the following maximizing factors:

1. Minimizing the per square feet cost of the retail floor
2. Product categorization ( Destination, Routine, Convenience, Seasonal)
3. Category assessment using Product Category Using Gross Margins return on Investment (GMROI)
4. Allocation of more space to fast moving products with high profit margins.
5. Allocation of more space to fast moving products with low profit margins.
6. Estimating the right demand for slow moving but high profit margins products, to reduce the inventory cost.
7. Decisions to keep or not, the slow moving products with low profit margins.
8. Trade off between Variety, Assortment and Product availability.
9. Vertical & Horizontal Display of Products
10. Customer Relation ship Management

Subject to constraints:

1. Inventory cost of assorted products
2. financial Budgets
3. floor space for assorted product
4. Variety & Availability of product.

The constraints may be taken care of in the strategic planning process with the sales objectives and trade area analysis.

The data analysis of trade area for a particular retail store is use full in developing the optimization equation and determining constrains. It also helps in developing new idea for delivering customer satisfaction.

In growing Indian retail market, developing a successful equation between retail space available and assortment of product, with plans to minimize the constraints, is the key to success to the retail operations.


Jones Lang LaSalle's third annual Retailer Sentiment Survey-Asia, http://www.oracle.com/applications/retail/mp/space_opt.html

Lalitya Vir Srivastava

Source: E-mail May 9, 2008


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