expanding through ebos vs mbos

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© 2012 TOCICO. All rights reserved.

TOCICO 2012 Conference

By Kiran Kothekar www.vectorconsulting.in

[email protected] +91 9820300753

Expanding through EBOs Vs MBOS. Building on the Consumer Goods SnT for a fashion goods company

mailto:[email protected]

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The discussion is for industry segment where companies sell their products through exclusive brand outlets or through MBOs, which could be small or in organized retail (malls). A large portion of customers needs to see and/or feel their products before making a buying decision. These companies have a large range and introduce new products continuously. Products include textiles, fashion footwear, home electronics and appliances, books, music, fashion clothing, etc. i.e. products range required by a large section of the consumer in most metros and towns. Excludes premium luxury brands such as Rolex for which, most times the buyer will search for the shop.

Scope of discussion

EBOs- Exclusive Brand Outlets- these are shops either owned by company/ brand or franchisee displaying and selling the brand(s) of the company only, and no other brand.

MBOs- Multibrand Outlets are shops not owned by the brand, which displays and sells multiple brands and has full control on the brands it wants to display and sell. They provide limited shelf space to many brands.

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As sales increase from the same store is limited, for any company selling through stores, the only option is to expand.

The need for more stores

It can expand through EBOs or MBOs

In retail, for a product whose need exists, for any new shop market always exists

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Why is there a question on which model to adopt?

EBOs Vs. MBOs

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EBOs

Companies start with strategy of only EBOs with the assumptions- • Prominent visibility of brand • Control on shopping experience • Display of wider range, including items which are risky for an MBO • Allows to display new range, to check market reaction • Minimize substitution by another brand, when a customer likes a style

Eventually lands up with • Limited reach • Huge capital locked • If the EBOs are owned by the company, then reduced

money for future buying, thus reducing freshness in shops and thereby footfalls and thereby further reduction in sales- then death

• If the EBOs are franchisees, the the franchisee owner discontinues due to very low ROI.

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MBOs

Companies start with strategy of only MBOs with the assumptions- • Huge increase in reach • No commitment to capital locked of the MBO

Eventually lands up with • Poor visibility of brand • No control on shopping experience • Very limited range on display, as shelf space provided is very low • Display of wider range, including items which are risky for an MBO • MBOs not willing to take high risk with new introductions • Easy substitution by other brands • Locked capital in slow movers, leading to lower buys

• I.e. lost sales

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On observing the shortcomings in either model, most companies soon adopt both models, and try to expand rapidly

Eventually lands up with • Same problems • Money locked in stocks • Lower range displayed • And ever reducing cash to buy new merchandise

• And then one day……..

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Each model provides for distinct significant needs of the company.

So what is direction of solution? The only way for company to have both models is by addressing each model’s negatives / risks for the EBOs/MBOs and the company i.e. work actively for the WIN of the shops.

How?

But such companies require both range and reach, and on a sustained basis

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The capital should not be locked in unwanted stocks i.e. non-movers or very high stocks of the movers (stock that is not selling immediately)

How?

By ensuring that the precious capital of the shops is always free to order what is selling or buy new merchandise

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Critical paradigm shifts (1)

• Usually companies procure or produce to a forecast for the season and try to push all the stock to the shops, even if it means giving some shops more than what they require, while others do not get any. The objective is to get rid of the stocks as fast as possible

Paradigm shift:

• First establish central warehouse (CWH) and hold back stock, not push

them forward. • ‘Core/ perennial items’ are replenished to a stock norm in the shops from

the CWH. • Any change in sales trends is managed through Dynamic Buffer Management

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• Usually companies follow predefined seasons and introduce new range 2-3 times a year. Hence the shops have to forecast buys for the whole season -a longer period.

Paradigm shift: • As forecasts are never accurate, shops land up with stockouts and surplus-

sales loss and inventory • To prevent this, the forecasting by shops for longer period by the shops

should be avoided- introduce many frequent introductions of lower range -Say every month

• I.e. the items are placed with minimum quantity. Rest is held back in central warehouse

• What is sold is replenished. • Winners are converted to replenishment items • Eliminates the pressure of the shops to buy for a longer period, and provides

freshness every month

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• Once sold to the shops, material is not taken back as sales people do not like their sales being decreased, companies do not want returns of non selling items. Company believes that some day the product will get sold.

Paradigm shift: • Through planned approach, what is not selling is taken back and

replaced with sellers/ new range for the shop

Huge risk!!!

If this risk is reduced significantly, then we can continue in this direction And gain in reach and range and expand rapidly

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• New franchisee an MBOs fear starting business with the company- they will get a huge dump of sellers and slow movers. Many companies use the new stores to clear of stuck inventory. In the process they give good credit as well.

Paradigm shift: • The initial inventory to a new store will be limited range of fast

movers only and stock not more than a month- replenish very frequently even if it is at higher transportation costs.

• Ensure that the store starts with a high ROI and starts to make profits by the 3rd – 4th month. Ie work to make the store profitable.

• With such a model, a new can be started without providing any credit.

• Cash of the company will not eb a constraint for expansion.

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Critical paradigm shifts (3,4)

• Not only is the capital locked, but precious shelf space gets occupied by slow movers. This decreases footfalls, and decreases sales and ROI further. The shops have no choice but to decrease the spend on the brand

• As the CWH is the aggregation point for the whole country, and holds stock only for a shorter period, the stocks of most slow movers (pulled back) will get exhausted to a great extent, only the countrywide losers will remain.

• With this model the same shelf space of the MBO can accommodate more range.

• Also as the MBOs experience higher ROI he will provide additional shelf space

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Advantages

• Continuous freshness • Higher sale through per square feet • Lower locked capital

• Stores become profitable fast and remain profitable, with minimum capital locked (not rotating)

• This is the lever for rapid expansion

Higher ROI

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Summary of paradigm shifts required to have both EBOs and MBOs growing and profitable

1. Increase introductions, with smaller range each time

2. Don’t allow shops to forecast for longer periods. Place minimum qty and wider range. I.e. don’t occupy shelf space by dumping.

3. Hold stock at a central ware house and replenish frequently only according to sales- don’t push

4. Start a new store with limited range of fast movers, with not more than 1-2 months of inventory.

5. Replace slow movers (take back slow movers) with sellers/ new range

6. Remind the MBOs of the higher ROI and ask more shelf space in return- don’t think MBOs will not agree

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Case- Liberty Shoes Ltd

• Largest Indian owned fashion footwear company in India. Sells more than 5000 SKUs through • The distribution network – which in turn sells through MBOs • Exclusive shops (EBOs) • And own large shops

• 4 years of flat sales, no profits. • 2 seasons • Push sales, like any other consumer goods company selling through stores

owned by others.

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Case- Liberty Shoes Ltd

• Set up CWH. TOC assisted in achieving near 97% availability CWH

• New introductions in 8 lots instead of 2 in the year

• Replenishment to stores, though not efficient

• Rapidly expanding in EBOs and MBO as the paradigms have been implemented. The floodgates have opened (or the limiting factor/risks of rapid expansion does not exist)

• Added about 90 EBOs to the existing 150 in one year. Nearly all stores have more than industry experienced ROI, and have inventory turns of >4. most EBOs in the industry have less than 2. Adding 150 more this year.

• 50% more distributors added. They see high ROI and profitable business

• Own large stores- increase sales by 30%, while decreasing inventory by 30%. The released capital used to ad 40% more stores.

• After 4 years of flat sales, last 2 years, after initiating TOC, 15% and 22% increase in sales.

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Presenter- Kiran Kothekar

Kiran is the Founding Director of Vector Consulting Group, India. Vector is the leader in TOC consulting in India. He has been consulting in TOC for the last 8 years. He has worked closely with Dr Eli Goldratt for 7 years. He has experience of implementing TOC in more than 25 companies. He has pioneered the development and implementation of TOC in Sales and Marketing and in Distribution / Retail. Vector Consulting Group has assisted in building, according to Eli Goldratt, one of the only two Ever Flourishing companies in the world, through TOC.

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expanding through ebos vs mbos

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