1. SUPPLY CHAIN MANAGEMENT BENCHING STUDY MINI PROJECT 2 GROUP 7
Period of Study: 2006-2010
OUTSOURCING TRENDS IN INDIAN
RETAIL INDUSTRY
Pantaloons vs. Spencer’s
ABSTRACT
This Project is done by the team as a part of Supply Chain
Management Course. The present study aims at finding different
SUPPLY CHAIN MANAGEMENT COURSE outsourcing practices and trends that is either being used in the Indian
Retail industry. Two retail giants Big Bazaar (Pantaloons) and Spencer
MINI PROJECT II
& Company Ltd are used for this study. This report is based on data that
PROJECT ON OUTSOURCING TRENDS IN
have been gathered from Capitaline and also direct and telephonic
INDIAN RETAIL interactions with company executives’ from Spencer and Big Bazaar.
TEAM MEMBERS:
VIVEK PAREKH 2010281
DEBASHISH BAGG 2010298
SAKSHI AGARWAL 2010206
SANKHA DIP DATTA 2010207
SHANTANU PANDEY 2010212
SHASHANK SHEKHAR TRIPATHI 2010213
BENJAMIN WEBER 2010FE01
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2. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
INTRODUCTION TO OUTSOURCING
Outsourcing is any task, operation, job or process that could be performed by employees within
an organization, but is instead contracted to a third party for a significant period of time.
The term outsourcing is used inconsistently but usually involves the contracting out of a business
function commonly one previously performed in-house to an external provider. In this sense, two
organizations may enter into a contractual agreement involving an exchange of services and payments.
The concept of outsourcing thereby helps the firms to perform well in their core competencies and thus
mitigating rise of skill or expertise shortage in the areas where they want to outsource.
Of recent concern is the ability of businesses to outsource to suppliers outside the nation,
sometimes referred to as off shoring or offshore outsourcing. In addition, several related terms have
emerged to grasp various aspects of the complex relationship between economic organizations or
networks, such as near shoring, multi-sourcing and strategic outsourcing.
One of the biggest changes of recent years has come from the growth of groups of people using
online technologies to use outsourcing as a way to build a viable service delivery business that can be run
from virtually anywhere in the world. The preferential contract rates that can be obtained by temporarily
employing experts in specific areas to deliver elements of a project purely online means that there is a
growing number of small businesses that operate entirely online using offshore outsourced contractors to
deliver the work before repackaging it to deliver to the client.
INDIAN RETAIL SECTOR
Indian retail market has been ranked 4th most attractive emerging market. India's retail sector
accounts for 12% of GDP with about 25 million people being employed and second largest employer after
agriculture in the country. Moreover, India's overall retail sector is expected to rise to around USD 600
billion by 2013. The organized retail currently accounting for around 5% is pegged at around USD 20
billion. It is expected to touch USD 107 billion by 2013.
The key challenges Indian organized retail industry faces are cost, availability and delivery of
quality products, cost efficient real estate, skilled service employees, and employee attrition in the
industry. The rentals continue to be the highest expense of modern retailers and are almost 4 to 5 times
that of their western counterparts continue to pose a challenge to their growth. Indian retailers have
difficulty in finding trained personnel and incur significant costs for training them.
PANTALOON RETAIL LTD.
Pantaloon Retail India Limited (PRIL), is a retailer which was incorporated on 12th October, 1987
and is headquartered in Mumbai. The company operates primarily through the Lifestyle and Value
formats with multiple delivery mechanisms and selling channels in their business, some of them are
fashion, food, general merchandise, home, leisure and entertainment, financial services, communications
and wellness. The Company has stores in 51 cities across the country, constituting over 6 million square
feet of retail space. In Value retail it is present through 78 Big Bazaar hypermarkets, 113 Food Bazaars
and other delivery formats.
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3. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
SPENCER’S RETAIL LTD.
Spencer’s Retail Limited is a multi-format food-first retailer providing a wide range of quality
products to discerning young customers - well-travelled citizens of the world, looking out for authentic
flavors and experiences in a fun-filled shopping environment. Part of the Rs 15,500 crore RPG Group,
Spencer run about 200 stores (including about 30 large format stores) across 35 cities in India. As one of
the earliest entrants in the retail space in India, Spencer’s also has a wide variety of electronics and
electrical equipment, home and office essentials, garments and fashion accessories, toys, and personal
care.
INTERPRETATIONS FROM THE RESULTS
Table 1 shows the calculation of Outsourcing Ratio that is basis of comparison of Pantaloons and
Spencer’s Retail format. Source of data for calculation in table 1 is Capital line database though annual
reports of individual companies were studied for further detailed data. A comparison of industrial wise
average is also included to compare what the firms have been doing differently. The Interpretation on the
data here is broadly classified to heads i. e. outsourcing ratio over the year and change in outsourcing ratio
with change in sales turnover.
Year 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
Sales Turnover 14905 33515 35298 27598 29983 39860 32497 33211 33662 22294
Retail
Industrial Raw Materials 13254 22705 23986 21686 23800 22053 20383 21820 20925 17587
Average
Outsourcing Ratio 0.89 0.68 0.68 0.79 0.79 0.55 0.63 0.66 0.62 0.79
Sales Turnover 4326 6317 6661 5296 3393 1962 1085 658 445 285
Pantaloons
Raw Materials 3144 3279 4783 4127 2611 1478 828 467 328 214
Retail Ltd.
Outsourcing Ratio 0.73 0.52 0.72 0.78 0.77 0.75 0.76 0.71 0.74 0.75
Sales Turnover 952 1133 854 540 291
Spencer’s
Raw Materials 727 892 771 444 259
Retail Ltd.
Outsourcing Ratio 0.76 0.79 0.90 0.82 0.89
Table 1: Outsourcing Ratio across Indian Retail industry
Figure 1: Outsourcing ratio
Outsourcing Ratio
0.90
0.70
0.50
2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
Retail Industrial Pantaloons Spencer Year
Average Retail Ltd. Retail Ltd.
1. OUTSOURCING RATIO
As can be seen from figure 1, outsourcing ration has been highly variable over the last decade. On
an overall outsourcing has gone up from .8 to .9 with the mean of .7 and standard deviation of 0.103. Both
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4. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
the firms under study have higher outsourcing with mean of Big bazaar lying at.72 just above industrial
average and variance 0f 0.07 where as Spencer have a mean of .83 and standard deviation of 0.06.
a. Raw Material
In case of Spencer’s and Pantaloon’s there is a stark difference between they manage their raw
material as Spencer’s does not purchase any basic raw material which can be processed further into
finished goods or intermediate goods. As can be seen from the Balance sheet and income statement
attached, it buys only trading goods which are in itself finished goods or intermediate goods that can be
processed further into finished goods. Hence it reduces considerable amount of cost in terms of raw
material management and the overall supply chain cost. From this it can be realized that Spencer’s does
significant amount of outsourcing as compared to other players in the markets be it Big Bazaar or others.
As in case of Big Bazaar they have got a number of in house brands which may be requiring
adequate amount of raw material to manufacture hence the Big Bazaar procures raw material which is the
basic requirement for further being processed into finished or intermediate good. Hence from this it can
be realized that Big Bazaar is a big in-sourcing player and outsources proportionately less than its peers
and competitors.
Pantaloons Retail Ltd. Spencer Retail Ltd.
0.80
0.95
Outsourcing Ratio
Outsourcing Ratio
y = -1E-05x + 0.7625
0.75 0.90 y = -0.0001x + 0.9136
R² = 0.1892
R² = 0.3386
0.70 0.85
0.65 0.80
0.75
0.60 100 600 1100 1600
100 2100 4100 6100 8100
Sales turnover
Sales turnover
Pantaloons Linear (Pantaloons Spencer Linear (Spencer
Retail Ltd. Retail Ltd.) Retail Ltd. Retail Ltd.)
Retail Industrial Average
1.00
Outsourcing Ratio
0.90 y = -1E-05x + 1.1032
0.80 R² = 0.8267
0.70
0.60
0.50
14000 24000 34000 44000
Sales turnover
Retail Industrial… Linear (Retail Industrial…
Figure 2: Sales Turnover vs. Outsourcing Ratio in Indian Retail Industry
2. CHANGES ON THE OUTSOURCING RATIO WITH RESPECT TO SALES
From the below figures we can see that there is a general trend in the Indian Retail Industry that
as the sales increase they seems to have been pulling out of outsourcing.
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5. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
3. SURVEY RESULTS
A survey on outsourcing trends in the industry have been circulated to Saurabh Biswas [4], Sumit
Dutta [5], Subhranil Dutta [6] a few prominent managers each firm under study. Results of the same can
be summarized as follows:
1. Indian retailers procure from multiple retailers than from a specific source.
2. Spencer aggregates at levels of capacity, inventory and transportation to get surplus from the
supply chain, while Big bazaar low cost and high quality as factors to select vendors with
transport aggregation being the common factor on which both depend.
3. One-on one negotiation is preferred by Spencer to enter into an outsourcing deal while Big bazaar
prefers reverse auction.
4. Big bazaar being a bigger and more established player don’t look for responsiveness when
Spencer weighs it equally to supply efficiency.
5. Both players enter into buy back contacts, when Spencer prefers quantity flexibility as additional
parameter to be responsive to market, Big bazaar prefers revenue sharing.
6. Logistics are basically handled by 3PL bodies. According to experts in both the organization 30%
to 60% of inbound logistics is handled by 3PL along with complete outbound logistics.
7. Spencer’s also enter into downstream outsourcing al the outlet end. Survey results show that these
firms don’t take franchise outlet and leased outlet different from their own outlet. Big bazaar on
the other hand prefers its own outlets, which also justifies as its outlets are much bigger and caters
to demand across many industry segments.
8. Spencer’s have an equal distribution of contractual and permanent staff. Survey results show that
Big bazaar’s staffs are all permanent but observation of one of the author (Debashish Bagg) of the
report is that Big Bazaar hires contractual staff from lower grade business schools and other
institutions in the name of internship to cater to seasonal fluctuation of its demand.
9. Both Biz Bazaar and Spencer’s takes details of Tier-2 suppliers also while entering into business
contracts
10. Spencer’s say that the outsourcing have increased on an overall basis when their own financial
statements don’t support the same statement. Big Bazaar agrees that its outsourcing have
increased over the last decade.
OUTSOURCING TRENDS AT SPENCER
Benjamin and Sankha Dip did interview a manager from Spencer’s Retail Ltd. to drill into more
details of outsourcing at their place. According to the manager outsourcing is preferably done for all kinds
of perishables due to high variety and good quality as well as seasonality at Spencer’s. The transport is
organized via third parties called ‘handy boys'. The last year has seen an increase in inventory cost, at
Spencer so there was a need to optimize stocking. Spencer's adapted Japanese 5S’ management technique
to achieve better efficiency in inventory management. Spencer's has warehouses in which FMCG1 and
personal care products are stored, no perishables.
Spencer being new or inexperienced in Indian retail business has to rely heavily on suppliers.
Retailer gains a higher margin on in-house brands that are procured from contract manufacturers and have
1
Fast moving consumer goods.
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6. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
to follow Spencer's corporate image because it's the retailer's own brand. Thus the quality standards for
the suppliers are higher; standardization allows easier streamlining of the overall business processes and
integration of the suppliers. Along with establishment of in- house brands, the processes of procurement
also will undergo changes.
In the past retailer relied on experience of its supplier for forecasting, procurement hence being
driven by the supplier and was a push cycle. Nowadays Spencer's forecasts the replenishment of most
processed goods on its own. Spencer's has changed for instance the process from push to pull for
Cadbury’s products. This plays an important role in the inventory management with regard to efficiency
and responsiveness. The deployment of functional Supplier Management Software under the aegis of
automation and digitization of processes further support this trend.
CONCLUSIONS
It can be concluded from the above that Big Bazaar have been moving to reduce its outsourcing
and all the outsourcing i.e. vendor management strategies have been kept aligned to its size of big player
in the Indian retail market. It has been keen on increasing the overall efficiency rather than being
responsive to seasonal demand fluctuations. Spencer on the other hand a very young player in the Indian
retail has being trying persistently to move out of its supplier dependencies. In either case fluctuations in
the outsourcing ratio seems to have a tendency to damp down in the near future.
LIMITATIONS OF THE STUDY
Due to most of the Indian retail sector being under control of local and unorganized player solid
conclusions on the outsourcing trends cannot be concluded. Even survey results may be depended on the
market that each player is focusing on.
CHANGES EXPECTED DUE TO FDI NORMS
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current
scenario of low competition and poor productivity.
Allowing FDI in retail trade, India will significantly flourish in terms of quality standards and
consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards
and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that allowing
healthy FDI in the retail sector might help in integrating the Indian retail market with that of the global
retail market in addition to providing not just employment but a better paying employment, which the
unorganized sector (kirana and other small time retail shops) have undoubtedly failed to provide to the
masses employed in them. The real results of this FDI norms are difficult to conclude and hence one need
to lookout for the real results.
REFERENCES
1. Annual reports of Spencer Retail.
2. Annual Reports of Pantaloon Retail Ltd.
3. Capitaline plus database. (Referred on 8th November, 2011).
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7. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
4. Mr. Saurabh Biswas,
Head Supply Chain & Planning at Spencer's Retail Ltd,
Gurgaon India. +919871545247, email: saurabhbiswas@hotmail.com
5. Mr. Sumit Dutta, Manager Operations,
Spencer's Retail Ltd, Kolkata, India. +919007138878. Email: sumit_da@yahoo.com
6. Mr. Subhranil Dutta, Store Mgr- Big Bazaar Kolkata
APPENDIX
Attached below are the balance sheets and profit and loss statements of Spencer’s retail and
Pantaloon Retail ltd for the five years of study. The report also includes aggregate data of the retail
industry that is extracted from Capital line website.
SPENCER’S RETAIL BALANCE SHEET
Year Mar 10 Mar 09 Mar 08 Mar 07 Mar 06
SOURCES OF FUNDS :
Share Capital 26.01 26.01 26.01 26.01 20.61
Reserves Total -468.58 -210.09 -32.42 57.69 16.23
Equity Application Money 767.45 618.65 248 0 6.25
Total Shareholders’ Funds 324.88 434.57 241.59 83.7 43.09
Secured Loans 57.18 76.28 84.54 87.3 17.28
Unsecured Loans 350 300 350 0 9.85
Total Debt 407.18 376.28 434.54 87.3 27.13
Total Liabilities 732.06 810.85 676.13 171 70.22
APPLICATION OF FUNDS :
Gross Block 402.02 442.83 359.41 125.18 61.1
Less : Accumulated Depreciation 101.32 68.82 43.97 22.68 13.38
Less: Impairment of Assets 0 0 0 0 0
Net Block 300.7 374.01 315.44 102.5 47.72
Lease Adjustment 0 0 0 0 0
Capital Work in Progress 35.48 65.17 86.91 21.36 10.35
Investments 88.25 80.3 1.01 1.01 0.01
Inventories 129.49 151.95 177.59 61.65 36.89
Sundry Debtors 18.7 24.88 27.71 11.73 6.61
Cash and Bank 13.54 27.8 28.29 22 7.05
Loans and Advances 82.55 89.19 174.86 59.39 30.06
Total Current Assets 244.28 293.82 408.45 154.77 80.61
Less : Current Liabilities and Provisions
Current Liabilities 172.19 171.33 192.63 106.07 66.84
Provisions 10.77 5.58 5.07 2.57 1.63
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8. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
Total Current Liabilities 182.96 176.91 197.7 108.64 68.47
Net Current Assets 61.32 116.91 210.75 46.13 12.14
Miscellaneous Expenses not written off 0 0 0 0 0
Deferred Tax Assets 246.31 175.45 71.95 0 0
Deferred Tax Liability 0 0.99 9.93 0 0
Net Deferred Tax 246.31 174.46 62.02 0 0
Total Assets 732.06 810.85 676.13 171 70.22
Contingent Liabilities 3.74 14.9 0.82 0.39 0.84
SPENCER’S RETAIL PROFIT AND LOSS STATEMENT
Year Mar 10 Mar 09 Mar 08 Mar 07 Mar 06
INCOME :
Sales Turnover 951.84 1,133.05 853.61 539.83 290.64
Excise Duty 0 0 0 0 0
Net Sales 951.84 1,133.05 853.61 539.83 290.64
Other Income 14.41 79.44 6.73 0.86 0.29
Stock Adjustments -26.41 -11.89 113.45 24.04 28.97
Total Income 939.84 1,200.60 973.79 564.73 319.9
EXPENDITURE :
Raw Materials 726.75 891.84 771.07 444.41 258.54
Power & Fuel Cost 25.45 39.84 28.14 11.84 5.06
Employee Cost 105.25 140.35 82.9 43.56 20.9
Other Manufacturing Expenses 28.13 32.95 19.93 11.64 5.24
Selling and Administration Expenses 204.63 266.78 172.44 83.6 34.97
Miscellaneous Expenses 103.33 51.7 4.02 5.21 3.28
Total Expenditure 1,193.54 1,423.46 1,078.50 600.26 327.99
Operating Profit -253.7 -222.86 -104.71 -35.53 -8.09
Interest 28.08 24.91 17.48 6.67 3.42
Gross Profit -281.78 -247.77 -122.19 -42.2 -11.51
Depreciation 48.57 40.79 27.74 9.4 3.65
Profit Before Tax -330.35 -288.56 -149.93 -51.6 -15.16
Fringe Benefit tax 0 1.55 1.39 0.74 0.38
Deferred Tax -71.86 -112.44 -62.02 0 0
Reported Net Profit -258.49 -177.67 -89.3 -52.34 -15.54
Extraordinary Items -61.38 70.65 -0.47 0.45 0.07
Adjusted Net Profit -197.11 -248.32 -88.83 -52.79 -15.61
P & L Balance brought forward -325.93 -148.26 -59.01 -6.67 -17.5
Statutory Appropriations 0 0 0 0 0
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9. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
Appropriations 0 0 0 0 -26.37
P & L Balance carried down -584.42 -325.93 -148.26 -59.01 -6.67
Book Value-Unit Cur -170.15 -70.77 -2.46 32.18 17.87
PANTALOON RETAIL BALANCE SHEET
Year Jun 11 Jun 10 Jun 09 Jun 08 Jun 07
SOURCES OF FUNDS :
Share Capital 106.9 41.23 38.06 31.86 29.35
Reserves Total 2,671.23 2,527.48 2,211.48 1,751.51 1,062.82
Equity Share Warrants 100 122.88 22.88 63.26 0
Equity Application Money 0 64.66 0 0 0
Total Shareholders’ Funds 2,878.13 2,756.25 2,272.42 1,846.63 1,092.17
Secured Loans 1,675.89 1,236.03 2,525.53 1,991.77 951.93
Unsecured Loans 497.23 150.19 299.86 200.01 347.65
Total Debt 2,173.12 1,386.22 2,825.39 2,191.78 1,299.58
Total Liabilities 5,051.25 4,142.47 5,097.81 4,038.41 2,391.75
APPLICATION OF FUNDS :
Gross Block 1,877.67 1,417.04 1,876.45 1,368.76 767.07
Less : Accumulated Depreciation 410.64 294.89 307.69 170.59 92.47
Net Block 1,467.03 1,122.15 1,568.76 1,198.17 674.6
Capital Work in Progress 100.13 59.68 345.23 330.64 131.13
Investments 2,255.41 2,002.91 954.03 586.52 252.01
Current Assets, Loans & Advances
Inventories 1,762.20 1,270.67 1,787.84 1,429.84 885.96
Sundry Debtors 185.24 123.57 177.25 113.16 65.17
Cash and Bank 85.77 100.54 109.34 121.1 162.97
Loans and Advances 478.92 423.02 1,208.31 964.48 635.35
Total Current Assets 2,512.13 1,917.80 3,282.74 2,628.58 1,749.45
Less : Current Liabilities and Provisions
Current Liabilities 1,166.48 863.42 916.39 620.08 343.89
Provisions 29.92 24.22 20.46 17.58 15.71
Total Current Liabilities 1,196.40 887.64 936.85 637.66 359.6
Net Current Assets 1,315.73 1,030.16 2,345.89 1,990.92 1,389.85
Deferred Tax Assets 19.03 29.87 2.77 27.19 2
Deferred Tax Liability 106.08 102.3 118.87 95.03 57.84
Net Deferred Tax -87.05 -72.43 -116.1 -67.84 -55.84
Total Assets 5,051.25 4,142.47 5,097.81 4,038.41 2,391.75
Contingent Liabilities 906.59 3,547.05 111.5 158.42 101.32
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10. OUTSOURCING TRENDS IN INDIAN RETAIL MINI PROJECT II GROUP 7
PANTALOON RETAIL PROFIT AND LOSS STATEMENT
Year Jun 11 Jun 10 Jun 09 Jun 08 Jun 07
INCOME :
Sales Turnover 4,325.57 6,316.66 6,661.42 5,295.88 3,392.79
Net Sales 4,325.41 6,316.66 6,661.42 5,295.88 3,392.79
Other Income 21.4 97.43 12.28 30.93 96.53
Stock Adjustments 494.15 -783.88 353.11 614.41 365.95
Total Income 4,840.96 5,630.21 7,026.81 5,941.22 3,855.27
EXPENDITURE :
Raw Materials 3,143.77 3,278.65 4,783.06 4,126.60 2,611.00
Power & Fuel Cost 71.44 83.2 98.97 78.2 61.51
Employee Cost 209.44 270.67 269.94 269.41 206.09
Other Manufacturing Expenses 89.35 136.61 182.44 155.23 113.19
Selling and Administration Expenses 766.76 1,041.88 867.12 716.88 488.07
Miscellaneous Expenses 105.07 142.64 144.56 103.45 63.28
Total Expenditure 4,385.83 4,953.65 6,346.09 5,449.77 3,543.14
Operating Profit 455.13 676.56 680.72 491.45 312.13
Interest 193.47 301.04 324.44 212.44 94.26
Gross Profit 261.66 375.52 356.28 279.01 217.87
Depreciation 146.37 161.88 140.05 83.39 36.86
Profit Before Tax 115.29 213.64 216.23 195.62 181.01
Tax 24 32.83 25.5 29.13 30.77
Fringe Benefit tax 0 0 1.89 3.24 2.32
Deferred Tax 14.62 1.25 48.26 37.28 27.93
Reported Net Profit 76.67 179.56 140.58 125.97 119.99
Extraordinary Items -3.69 44.42 -2.38 -0.93 60.12
Adjusted Net Profit 80.36 135.14 142.96 126.9 59.87
Adjust. below Net Profit 0.16 0 0 -49.09 0
P & L Balance brought forward 495.98 380.54 267.56 215.76 116.59
Appropriations 66.44 64.12 27.6 25.08 20.82
P & L Balance carried down 506.37 495.98 380.54 267.56 215.76
Dividend 20.27 17.13 11.57 10.67 7.54
Preference Dividend 0.01 0 0 0 0
Equity Dividend % 45 40 30 30 25
Earnings Per Share-Unit Cur 3.38 8.57 7.28 7.79 8.09
Book Value-Unit Cur 125.04 124.6 118.21 111.95 74.42
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