Differences: The Airport Duty Free Market

Traditional supply chains hardly consider airport outlets as a serious contender in their distribution strategy. However for SCMluxe, its an important point of sale, especially for fragrances, alcohol and tobacco products.  The travel market is defacto a monopoly market with severe restrictions in place - such as quantity and value of goods a customer can carry between countries. Prices are however cheaper than local markets which added with the right ambiance and customer profile (business and first class travellers) makes the airport store an attractive proposition when compared to the flagship high street store for luxury goods.

"Flagship stores can be the symbol of a brand, by way of a boutique, is of utmost importance, as it gives the consumer a glimpse of what the brand is all about and what it stands for" - Joshua Shulman, CEO, Jimmy Choo

We also see that the investment in flagship stores are particularly high with footfalls also being lower. A large investment is necessary in communication and branding to bring the "right" sort of consumers to the store. Another disadvantage is that in emerging economies like India, the lack of a high street inhibits companies from entering these growing markets (Refer Lack of high streets in BRICS ). The airport store is a convenient option in such cases providing the right ambiance for a captive market with assured footfalls.

Narita Airport Store - Japan

To sum up in the words of Michele Norsa, CEO, Salvatore Ferragamo:

" Airports are the shopping destination that brands need to keep an eye on, while they continue to be present in the right hospitality establishments. People in transit have the time and inclination to buy. It's not only indulgent buying but also for gifting purposes. A lot of that happens in airports"

Differences: Merchandising in SCM and SCMluxe

A walk through a big box store or even a high street department store shows up neatly organized products displayed with prices indicated in bold stand out fonts. Clear signage with regard to prices is seen as absolutely imperative in merchandising in traditional SCM for products that a Walmart or a Waitrose would sell. However in the case of luxury products this is very different, products are far and few interspersed with design elements (that are not for sale!) and signage for price of products is very unobtrusive if not invisible. These differences are vital for luxury products where the product and its innate qualities are being sold vis a vis its cost and functional value. Let us look at some of the differences in SCM and SCMluxe in merchandising and distribution

Characteristic	SCM	SCMluxe
Visual Merchandising	Not as important as ensuring easy and efficient access to the products and flow around the store	Extremely important and significant investment is made in store design/window display and location of store.
Distribution	Long distribution chain with wholesalers, distributors, retailers and other channel partners (online sales etc)	Usually exclusive distribution channels if not own brand stores. Internet is not used for sales but mainly for communication purposes only
Customer focus	Not personalized and emphasis on customer comfort	Very customized customer experience needs to be managed in store
Retail time to sale	Short decision making time periods and no effort required to “sell” in store (pick and drop in shopping cart!)	Long decision for sale to happen. Customer needs to be educated on product and may make several visits to retail store before final purchase
Incentivisation of sales staff	Sales commission an important component of incentives for Sales persons	No sales commission to sales persons due to the long sales cycle and aggressive selling that might result from such incentivisation
Promotions	Mostly defined by sales, bargains, clearances etc	Mostly driven by special and exclusive events such as art shows, fashion shows, exclusive charity fundraisers/auctions etc
Cost	Cost of distribution is low and aim is to reduce cost of distribution per sales	Cost of distribution is high due to high personalization required. Metrics generally focus on increased CSat, % of repeat purchases, incremental increase in revenue etc
No. of retail points	Large number of stores or many check out points in big box mega store	Smaller number of retail stores and check out or billing is normally personalized and taken care of by sales person

Differences: Pricing in SCM and SCMluxe

Luxury goods immediately translate to expensive, high priced goods. However simply increasing price on a product does not make it a luxury product – intrinsic value must be built up by quality and brand communications to justify the high price and its admittance into the world of luxury. We have also seen that a strategy of simply increasing price will backfire immediately since entry barriers are low – how long does it take for another company to increase its prices and advertising of such increased prices?

Pricing strategy is therefore an important element of SCMluxe and is very different from the traditional SCM. Let us look at some of the differences in pricing in SCMluxe Vs. traditional SCM

Characteristic of Price	Traditional SCM	SCMluxe
Perception of Price	In absolute quantitative terms ($ per unit or SKU)	More qualitative (world’s most expensive perfume – joy)
Price Elasticity (Coefficient of Elasticity)	Sales are always inversely proportional to price. Hence price has a negative coefficient of elasticity with sales	Sales tends to increase with price as a result of increase in perceived value of the luxury product (called Veblen effect) making the coefficient positive or null in most cases. We see that in some cases when price falls below a threshold value it ceases to be regarded as a luxury product and sales may eventually fall
Price curve over time	Almost always prices need to decrease over time to incorporate better SCM capabilities and to address competition	Price tends to remain stable or increase over time to showcase “timelessness” and increased value from product. SCM capabilities in reducing costs go towards increasing profit margins.
Perceived Value	Notion of perceived value is mostly not applicable	Perceived value is always maintained above actual value by brand communications since the luxury market is geared towards gifting and perceived value plays a very important role
Price Communications	Upfront and directly available either on product or in all communications	Almost never communicated directly. All price communications are couched in terms of the value it creates. Selling if of the product and its timeless value and not on its price
Discounts and Sales	Regular feature needed to clear inventory for new stock	Never resorted to with inventory being destroyed in most cases. Fragrances is one major exception to this rule
Global and local pricing	Large differences due to local market dynamics and cost structures	Typically follows uniform global pricing since the luxury customer is mobile and can shop worldwide. A stark example is from luxury retailers in India who have to bear very high customs duties but still retain prices at global levels by absorbing the costs into their lower profit margins

Thus we see that pricing and its management is not only crucial but also needs to follow a very different approach than one used for traditional industries. Veblen goods or not, luxury goods are unique in not following the herd in matters related to price – as widely seen in the increasing sales and prices of goods from the maisons of Richemont, LVMH, PPR etc. The recent recession is almost non-existent in the annual reports of these companies.

Outsourcing and SCMluxe (Part 3 of 3)

Some of the business models used for offshoring/outsourcing business services as Shared Service Centers (SSCs) are as below:

Sl No	Model	Characteristic	Pros	Cons
1	Captive SSC	Owned by company but process consolidated in single location	Better Control and ownership	Not cost effective
2	Outsourced SSC	SSC operated and owned by third party vendor of services	Best practices, economies of scale, cost effective, ability to focus on core competancies	No ownership, initial employee dissatisfaction
3	Distributed	Business services delivered from distributed locations	Local requirements completely addressed	Lack of economies of scale and cost effectiveness
4	Nearshore	SSC operated in a location close to centers of delivery	Local requirements partly met. Some cost advantages	Not as cost effective as offshore delivery
5	Offshore	SSC operated from distant low cost country (Eg: India, Phillipenes etc)	Cost effective, economies of scale	Local requirements and cultural issues not met

Note that typically even for a single process the model can be a combination of the above. For example in vendor management process, the identification of the vendor can be done onsite and in a distributed fashion without any consolidation but the transactional activity of performance evaluation can be done from a shared service center (SSC). Even here the evaluation done based on data obtained from the IT (or ERP) systems like % rejections, % on time deliveries etc can be done from an offshore location while the actual audit at the vendor's premises will need to be done locally and onsite.

Some of the business processes in SCMluxe and recommendations for the shared service model is as below:

Sl No	Business Process	Business Model	Location
1	Supply Chain Planning	Captive - SSC	Onsite
2	Demand Forecasting	Captive - SSC and Distributed	Nearshore
3	Direct Procurement	Captive - SSC	Onsite
4	Indirect Procurement	Outsource - SCC	Offshore
5	Vendor Management	Captive - SSC	Onsite/ Nearshore
6	Inventory Management	Outsource - SSC	Nearshore/ Offshore
7	Fulfillment	Captive - SSC and Distributed	Nearshore/ Offshore
8	Order Management	Distributed	Onsite
9	Logistics	Captive - SSC and Distributed	Onsite and Nearshore
10	Returns Management	Captive - SSC and Distributed	Onsite and Nearshore
11	Master Data Management	Outsource - SSC	Offshore
12	Supply Chain Analytics	Outsource - SSC	Offshore
13	Customer Relationship Management	Captive SSC and Distributed	Onsite

Again it is to be noted that for each sub process a different model maybe used. However only broad indications are provided here based on the risk and opportunity each process provides in outsourcing or offshoing in SCMluxe

Outsourcing and SCMLuxe (Part 2 of 3)

Outsourcing business processes like Finance and Accounting, HR administration or Customer Service Call Center processes are done for several reasons:

1.   Lower costs from moving operations to lower cost locations (like India, Philippines etc)

2.   Economies of scale from consolidating these transactional processes in a single location

3.   Ability to build centers of excellence wherein best of breed solution and best practices can be deployed

4.   Convert capital expenditure involved in processing these transactional tasks into variable expenses by outsourcing to a vendor who can then bill based on volume of transactions handled. Thus enabling the move from a capex to an opex model for business processes

5.   Managing volume fluctuations for these processes and the inability of a company to provide resources during peak periods while maintaining them during periods of low volumes. For eg: a retail company may require only 100 people to process customer orders in low season but during the Christmas holiday season would require 500 people to perform the same tasks. How does it staff these peaks, what do the staffs do during the rest of the year. How does one manage attrition and employee development in such a situation? Outsourcing to a specialist provider of these services is one answers

6.  Advantages of 24/7 hour operations by utilizing time zone differences across the globe

Traditionally companies have tended to offshore transactional low

end work like bookkeeping and call center operations. Companies are moving towards offshoring processes requiring higher skills like supply chain operations (order management, fulfillment or inventory management and indirect procurement).

Let us look at what factors need to be considered while considering offshoring SCMluxe processes:

1.   Brand capital: Any processes which directly impact the brand should not be offshored for whatever reason since the heart of a luxury product is its brand value. Design and marketing  communications are examples of processes which need to be kept in-house

2.   Customer Facing processes: Processes which need direct interaction with the customer, either in person or over phone. Customer service for instance always need to be local and personalized and not delivered remotely from a low cost country (LCC)

3.   High cost administrative tasks: Luxury companies typically have offices in high cost locations. Though retailing requires such locations, the administrative tasks such as finance and accounting, HR administration, Travel and Expenses administration need not be performed from these high cost locations

4.   Disbursed administrative processes: Activities that are performed from disbursed locations such as warehouse mgmt, inventory and merchandising planning, logistics administration,  might benefit from consolidation of processes in a single location

5.   High Volume processes: Certain processes which have high volume benefit from consolidation and driving benefits from discounting. Processes such as indirect procurement and Travel and Expenses accounting, hospitality mgmt will benefit from consolidating volumes and obtaining discounts

In the next post we will discuss specific SCMluxe processes which will  lend themselves to outsourcing and the models we can use for these processes

Outsourcing and SCMLuxe – Part 1 of 3

Outsourcing consists of two separate and discrete areas in any industry/operations:

1.       Outsourcing of operations of the firm – such as production/logistics etc

2.       Outsourcing of business operations of the firm – such as Finance and Accounting, HR Administration and Purchase (mainly indirect procurement)

Let’s look at each area separately since they are very distinct and need to be analysed independently.

Outsourcing operations:

Here the options considered are outsourcing operations like production, logistics or even the distribution of goods and services. Two of the models of outsourcing operations are:

China's increasing share of global procurment....

1. Outsourcing production to low cost locations: China is now the back office for most manufacturing companies due to low labour costs and economies of scale possible in the country. Some of the dangers of outsourcing operations is dealt in the posts  location and country of origin for SCMluxe and Make Strategy for SCMluxe. One must remember not to dismiss LCC production totally since it does bring the product closer to the customer and helps reduce lead times and possibly the quality of the product – something that might not be important for products like jewelry and perfumes but certainly of importance in a product like premium yogurt or bread. For instance a leading provider of organic luxury bread produces its dough in its country of origin in France but ships it over to its major market in China where its licensees/customer’s bake it in specialized ovens provided by the company. If not for this case of postponement strategy being put in place (see post on mass customization for postponement definition at Postponement strategy), this particular perishable product, bread, would never have been able to be sold in distant markets like China

...and one of the reasons why

2. Licensing or subcontracting parts of production or distribution: Licensing is the most widely used tools for faster growth in most industries and especially in the luxury goods sector. It frees up capital and growth can be achieved with very little investment. But it also leads to dilution of the brand equity if not managed well and problems of maintaining the relationship with the licensee (see posts “counterfeits” and “types of licensing and subcontracting”). Managing both the contract and the licensing agreements becomes of particular interest in SCMluxe.

In the next post we will see the outsourcing to LCC countries of business processes

Using counterfeits to refine Distribution Strategies

Counterfeits and fakes are the bane of the luxury goods industry. However in this post lets look at how its existence (or lack of it) can influence the distribution strategy:

• Counterfeits flooding market



 Bags on sale - time to set up a proper shop?



This typically indicates a deep desire and "want" for the product in the market. Besides taking manufacturers and purveyors of fake goods to court, communication of the genuine goods, drumming up public support against counterfeiting, we would need to relook at distribution and the availability of the brand in local markets.  For instance counterfeits could indicate that the distribution is too restricted and unavailable (or too tedious to purchase) for genuine buyers. Introduction of more retail points and Internet sales in case the market does not have infrastructure to support too many retail outlets would be good options.

• Absence of Counterfeits in the market

In markets where IP and trade mark protection is lax, the complete absence of fakes/counterfeits reveals a more fundamental problem - a lack of demand or desire for the luxury product. This could be due to the unsuitability of the product to local culture/needs or lack of awareness of the product. For the latter, a good communications and marketing investment would be needed. However the distribution will need to be controlled and muted, perhaps targeting only a small percentage of high income globe trotters in the market or tourists/foreigners. Fewer retail outlets located in five star hotels catering to visitors might be an option

• Good quality counterfeits in the market

The presence of near identical counterfeits of good quality and which is difficult to distinguish between the original may require further investigation. Licensing brands or sub-contractors in local markets might be deviating from contractual terms and allowing products to flow into the grey market. Distribution is such markets should normally be kept inhouse and subcontracting avoided, else a cast in stone contract drawn out with regular audits conducted in the market

Emerging markets and the lack of high streets

With growth in luxury markets moving to emerging economies, a common problem experienced by luxury retailers is that high streets are mostly not up to the mark or in some markets like India are completely absent. Location of a store is of prime importance in the success of luxury goods and an unsuitable one can be suicidal especially if consumers in these countries who are quite well travelled can afford to pick up their luxury fixes in a much more appealing environment in the traditional high streets of Europe or USA.

The options so far for most purveyors of luxury in these markets were limited stores in five star hotels. This is not only a very expensive option but restricts the target customer to visitors and foreigners which defeats the very purpose of having a local presence for local customers. With these economies growing, some more options are coming up – mainly high end malls and gentrified streets where a group of high end stores huddle up and create an oasis of luxury. Costs of the options indicate why the move to a gentrified street might make sense:

Location	Approximate costs in Mumbai, India	Cost per month for 3000sq.ft store (280 sq.meters)
Five Star Luxury Hotel	Rs.1000 per sq.ft  per month (Euro 15 or USD 22)	Rs.3mn (Euro 45000, USD 66000)
High End Mall	Rs. 400 per sq.ft per month (Euro 6 or USD 9)	Rs.1.2mn (Euro 18000, USD 27000)
Gentrified Street	Rs.200 per sq.ft per month (Euro 3 or USD 4.50)	Rs.600k (Euro 9000, USD 13500)

 The changing market dynamics have contributed to luxury retailers creating and moving into high streets in these markets:



·    The rise of the well travelled domestic consumer – purchasers of these products are not   only foreigners but mainly local High Networth Individuals

·    The high cost of rentals in luxury hotels and limited visibility

·    The growth of high end malls with the right ambiance and exclusivity in these markets

·    The possibility of huddling together in cheaper “gentrified” streets and creating a high street

Hermes, Mumbai - India

Cheaper rents also mean substantial investments can be made on the store and in developing the shopping street or estate in cooperation with local city authorities (mainly in design and maintenance sponsorships). Hermes always the leader of the pack in innovating the retail end of its supply chain has already moved out of its luxury hotel location in Mumbai and set up space on Ballard Estate – a gentrified street with other high end local boutiques. Will the others be following suit?

 

Hermes Dry Fruit Stores - also Mumbai - India



Much will depend on the ability of these pioneers to create a high end piece of real estate providing the same level of desirability and convenience to local consumers as their regular haunts abroad - and at the same time protecting the brand and its image!