DEC 22,2024

MANAGEMENT
ACCOUNTING
ANALYSING THE V-MART DILEMMA

Prepared By Group 4:

Sathwik Panicker (IPM03147)

Shreya Shakya (IPM03156)
Tanvi Kude (IPM03167)
Yash Agarwal (IPM03180)
Soumya Rashin Kujur (PGP15230)
Sharayu Vyavahare (PGP15261)
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Executive Summary

This report examines the operational and financial challenges faced by V-Mart Retail Ltd, a
leading Indian retail chain, through the lens of insights from the Dakota Office Products (DOP)
case study. The goal is to identify key problem areas and recommend practical solutions to
enhance profitability and efficiency. The DOP case study revealed how poor cost allocation
and unaccounted service expenses led to financial losses, even with strong sales growth. V-
Mart faces similar hurdles, including rising costs in warehousing, distribution, and order
processing, as well as challenges in managing profitability across different customer segments.
Using V-Mart’s FY 2023 data, this report highlights inefficiencies like manual operations,
underutilized resources, and high service demands from certain customer groups that erode
profit margins.

Despite strong revenue growth, V-Mart’s profitability is under pressure due to operational
inefficiencies and increasing overhead costs. To address these issues, the report recommends
implementing Activity-Based Costing (ABC) to better allocate costs across operations.
Additionally, identifying unprofitable customer segments and introducing premium charges for
high-demand services can help protect margins. Automating processes such as data entry and
delivery tracking would further reduce costs and improve operational efficiency. Finally,
incentivizing faster payments can ease cash flow pressures and reduce reliance on borrowed
funds.By adopting these strategies, V-Mart can improve its cost management, streamline
operations, and boost profitability, addressing challenges similar to those faced by Dakota
Office Products.

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Introduction to Problem / Decision Dilemma

V-Mart Retail Ltd is facing a tough challenge: rising operational costs and shrinking profit
margins, even though its revenue continues to grow steadily. The key issues lie in inefficiencies
in warehousing, distribution, and order processing, along with the added strain of meeting
diverse customer demands, such as frequent deliveries and delayed payments. These problems
are strikingly similar to those in the Dakota Office Products (DOP) case study, where
unrecognized service costs and outdated cost allocation methods led to financial struggles
despite strong sales growth.

In DOP’s case, services like manual order entry and desktop deliveries were not factored into
pricing, resulting in hidden costs that ate away at profits. Similarly, V-Mart’s traditional cost
management practices don’t accurately reflect the true cost of serving different customers,
making it difficult to identify where they’re losing money. This is especially concerning in a
highly competitive, price-sensitive market like retail, where every rupee counts. Without
addressing these inefficiencies, V-Mart risks further financial strain and losing its competitive
edge.

Fixing this is not just important—it’s essential for V-Mart’s future success. By adopting smarter
cost allocation methods like Activity-Based Costing (ABC), V-Mart can get a clearer picture
of its expenses and make better pricing decisions. Identifying unprofitable customers and
charging extra for high-service demands can help protect margins, while streamlining
operations will boost overall efficiency. Learning from DOP’s mistakes, V-Mart has an
opportunity to tackle its challenges head-on, optimize costs, and build a stronger, more
sustainable business in an increasingly tough retail environment.

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Company Overview – V-Mart Retail Ltd

Introduction to V-Mart Retail Ltd

V-Mart Retail Ltd is one of India’s leading retail chains, specializing in affordable fashion,
homeware, and general merchandise. Established in 2002 and headquartered in Gurugram,
Haryana, V-Mart focuses on serving value-conscious customers in Tier II, III, and IV cities. By
offering quality products at competitive prices, the company targets India’s burgeoning middle
class and low-income groups in semi-urban and rural markets.

Business Model and Operations

V-Mart’s operations are centered around its extensive retail network and efficient supply chain.
With 425 stores across 25 Indian states as of FY 2023, the company follows a cluster-based
expansion strategy, opening stores within a 200-300 km radius to optimize logistics. The
company’s product portfolio consists primarily of apparel (80% of revenue), supplemented by
non-apparel items such as footwear, accessories, and home furnishings. V-Mart also introduced
FMCG products to cater to evolving customer preferences. Its supply chain includes five major
distribution centers in key regions like Uttar Pradesh and Bihar, ensuring smooth delivery of
goods to stores.

Despite implementing technology for inventory tracking, some manual processes persist,
particularly at the store level, contributing to inefficiencies and rising operational costs.
Additionally, customer profitability varies due to high service demands such as discounts and
returns, a challenge similar to the Dakota Office Products (DOP) case study.

Financial Performance Overview

In FY 2022-23, V-Mart recorded an 11.6% revenue growth to ₹1,950 crores. However, rising
operational costs impacted its profitability, with net profit declining by 39.1% to ₹28 crores.
Gross profit margins also fell by 2.1%, while operating costs rose by 11.4%, driven by
warehousing, logistics, and store operations. A slower inventory turnover ratio of 4.2 further
strained cash flow, tying up working capital.

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Here’s the financial performance overview in a tabular format:

Key Financial Metrics FY 2022-23 FY 2021-22 Growth (%)

Revenue (₹ Crores) 1,950 1,747 11.6%

Gross Profit Margin 28.1% 30.2% -2.1%

EBITDA Margin 7.5% 8.1% -0.6%

Net Profit (₹ Crores) 28 46 -39.1%

Operating Costs (₹ Crores) 440 395 11.4%

Inventory Turnover Ratio 4.2 4.8 -12.5%

This table highlights V-Mart’s revenue growth, profitability challenges, and rising operational
costs, providing a concise financial snapshot for FY 2022-23 compared to FY 2021-22.

Operational Challenges

V-Mart’s key challenges include high warehousing and delivery costs, customer profitability
variance, manual order processing inefficiencies, and cash flow management issues. Rising
fuel prices and logistical inefficiencies have inflated supply chain costs. Payment delays and
slow inventory turnover affect working capital, increasing borrowing costs.

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About The Industry : Key Players and Competition

1.V-Mart Retail Ltd

V-Mart Retail Ltd focuses on affordable fashion and general merchandise, primarily catering
to smaller cities and rural areas. In FY 2023, the company reported a revenue of ₹1,950 crores,
driven by its value pricing strategy, which targets cost-conscious consumers in less competitive
markets.

2.Shoppers Stop

Shoppers Stop is a premium retail chain targeting high-income customers, with a strong
presence in Tier I cities. It generates a higher revenue of ₹3,945 crores, benefiting from its
premium positioning, which results in better margins. With a gross profit margin of 36.5%,
Shoppers Stop significantly outperforms V-Mart, whose margin stands at 28.1%.

3.Trent Ltd (Westside)

Trent Ltd, operating under the Westside brand, focuses on mid-premium fashion stores in urban
and semi-urban areas. With the highest revenue among its competitors at ₹6,481 crores, Trent
Ltd is known for its best-in-class operational efficiency. The company enjoys the highest gross
margin in the segment at 41.2%, reflecting its strong operational capabilities and premium
product offering with strong private label strategy.

Industry Trends and Challenges:

Key Trends:

1. Growth in Value Retail: 2. Operational Evolution:

-Increasing demand in Tier II, III, and IV -Movement toward automated systems
cities
-Growing importance of efficient supply
-Rising middle-class consumption chain management

-Focus on affordable fashion and -Emphasis on private labels for better

merchandise margins

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Major Challenges:

1. Cost Management

V-Mart faces significant challenges in managing costs, particularly in warehousing and

logistics, which account for 10.5% of its revenue. Manual processes further inflate operational
expenses, creating inefficiencies in day-to-day operations. Rising fuel and transportation costs
add additional pressure, making cost optimization a critical priority for sustaining profitability.

2. Working Capital Management

Long working capital cycles, averaging 117 days, pose a major challenge for V-Mart.
Ineffective inventory management ties up valuable resources, while payment delays from
vendors strain cash flow. These factors combine to limit the company’s financial flexibility,
making it difficult to invest in growth or operational improvements.

3. Margin Pressure

Operating in the highly competitive value retail segment, V-Mart faces significant margin
pressure. Intense price competition, especially in smaller cities, reduces profitability, while the
high cost of goods sold (72% of revenue) further limits its ability to improve margins. These
challenges demand a strong focus on cost control and strategic pricing.

4. Supply Chain Efficiency

V-Mart’s supply chain struggles with inefficiencies stemming from a complex distribution
network. Inventory turnover remains a challenge, leading to tied-up working capital and
potential stock obsolescence. High last-mile delivery costs further erode profitability,
underscoring the need for streamlined logistics and enhanced supply chain management.

5. Customer Service Demands

Increasing customer expectations add another layer of operational complexity for V-Mart. High
service costs, particularly for returns and exchanges, strain resources and impact margins. The
growing need for efficient order processing highlights the importance of investing in
technology and process automation to meet customer demands effectively.

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Gaps and Inefficiencies

Despite its strong market presence, V-Mart faces several critical gaps and inefficiencies. The
company lags behind competitors in technology adoption, relying heavily on manual processes
for cost tracking and allocation. This technological gap increases operational costs and limits
real-time cost monitoring. Operational inefficiencies further exacerbate these challenges, as V-
Mart’s warehousing and logistics costs are higher than industry standards. Slower inventory
turnover (4.2) ties up working capital, while manual order processing inflates expenses.
Additionally, V-Mart struggles with accurate cost allocation, especially in assigning overhead
and service-related costs, leading to limited visibility into indirect cost drivers. These
inefficiencies significantly impact the company’s financial performance and operational
resilience.

Recommendations

Technology Integration: V-Mart should adopt automated cost tracking and real-time
monitoring tools to reduce manual dependencies and improve cost allocation accuracy.
Leveraging advanced analytics will provide actionable insights for better cost management.

Process Optimization :Streamlining manual workflows, upgrading inventory systems, and

enhancing order processing efficiency can improve turnover, reduce costs, and enhance
operational efficiency.

Cost Allocation Refinement :Refining cost allocation methods is essential for better overhead
distribution and tracking service-related expenses. Improved visibility into indirect costs will
enhance financial transparency.

Benchmarking Practices: Regular benchmarking against industry leaders like Trent Ltd and
Shoppers Stop will help identify gaps, adopt best practices, and continuously improve cost
management systems to stay competitive.

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Existing Costing Techniques Used By The Firm

Financial Analysis & Cost Breakdown

In this section, a detailed financial analysis of V-Mart Retail Ltd will be conducted, focusing
on key cost components such as warehousing, delivery, and operational expenses. Inspired by
Dakota Office Products' activity analysis, Activity-Based Costing (ABC) will be applied to
V-Mart’s cost structure to identify cost drivers and evaluate their impact on overall profitability.

Activity-Based Costing (ABC) Framework

Activity-Based Costing (ABC) allocates overhead costs based on specific activities performed
within an organization. Unlike traditional costing methods, ABC identifies cost drivers and
assigns costs based on resource consumption.

Key Activities in V-Mart (Similar to Dakota):

1. Warehousing and Storage: Handling inventory across distribution centers.

2. Order Processing: Managing manual and automated inventory orders.

3. Delivery and Logistics: Transporting inventory to retail stores.

4. Customer Service: Returns, refunds, and promotional activities.

Breakdown of V-Mart's Costs

The financial data for FY 2022-23 (derived from V-Mart's annual report) provides the basis for
analyzing key cost drivers:

Expense Category Amount (₹ Crores) % of Total Revenue

Cost of Goods Sold (COGS) 1,404 72.0%

Warehousing Costs 115 5.9%

Logistics and Delivery 90 4.6%

Store Operating Expenses 235 12.1%

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Order Processing Costs 42 2.2%

General and Administrative Costs 64 3.3%

Interest Costs 33 1.7%

Key Observations:

1. COGS dominates costs: V-Mart spends 72% of its revenue on purchasing goods for
resale.

2. Warehousing and Logistics: Combined, these account for 10.5% of total revenue,
indicating significant operational costs similar to Dakota’s carton handling and delivery
activities.

3. Order Processing Costs: At 2.2% of revenue, manual processes remain a burden for V-
Mart.

Activity-Based Costing Analysis for V-Mart

To analyse costs effectively, V-Mart’s activities are broken down into three key cost pools:

1. Warehousing and Storage Costs

• V-Mart operates 5 major distribution centres that handle product receipt, storage, and
shipment to stores.

• Cost Driver: Number of cartons handled.

• Data: V-Mart processed an estimated 20 million cartons in FY 2023.

Activity Total Cost (₹ Crores) Cost per Carton (₹)

Receiving and Storing Inventory 115 5.75

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2. Logistics and Delivery Costs

• Inventory is transported to stores using third-party logistics providers.

• Cost Driver: Number of deliveries made.

• In FY 2023, V-Mart completed 500,000 deliveries across its 425 stores.

Activity Total Cost (₹ Crores) Cost per Delivery (₹)

Store Replenishment Delivery 90 180

3. Order Processing Costs

• Orders are managed both manually and through automated systems.

• Cost Drivers: a) Number of manual and b) automated orders processed.

Activity Hours Total Cost (₹ Cost per Order

Spent Crores) (₹)

Manual Order Processing 200,000 28 140

Automated Order Validation 100,000 14 140

(EDI)

Comparison of Costs: Manual vs. Automated Orders

Manual Processes:

• Manual order processing incurs higher labor costs due to time-intensive data entry and
validation.

• For example, Dakota’s Customer B, who placed more manual orders, led to higher
order processing costs.

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Automated Processes:

• V-Mart’s use of automated systems for order validation (similar to EDI in the Dakota
case) reduces costs.

• However, automation adoption is limited, with manual orders still dominating

operations.

Strengths of the Current ABC System

1. Activity-Level Cost Visibility

The current Activity-Based Costing (ABC) system provides a detailed breakdown of costs by
specific activities, enabling a clear understanding of resource consumption patterns. This
granularity helps identify high-cost activities, offering valuable insights for cost optimization
and resource allocation.

2. Cost Driver Analysis

The system establishes a clear linkage between activities and their cost drivers, facilitating a
better understanding of cost behavior. This connection enables more accurate cost allocation,
ensuring that resources are appropriately attributed to the activities that consume them.

3. Customer Profitability Analysis

The ABC system supports customer profitability analysis by distinguishing between profitable
and unprofitable customer segments. This insight enables service-based pricing strategies and
informed decisions regarding customer service levels, ultimately enhancing overall
profitability.

Limitations of the Current ABC System

1. Manual Process Dependencies

The ABC system relies heavily on manual data entry, making cost tracking time-consuming
and prone to errors. These dependencies create inefficiencies and increase the risk of
inaccuracies in cost allocation.

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2.Limited Automation

A lack of integration with modern technology limits the system’s capabilities. The absence of
real-time cost tracking and the need for manual reconciliation further hinder the system's
efficiency and responsiveness.

3.Incomplete Cost Allocation

The system struggles to allocate certain overhead costs properly, making it difficult to measure
and assign indirect costs to specific activities. This limitation can result in an incomplete view
of the true cost structure, affecting decision-making accuracy.

Impact of Costs on Profitability

1. Warehousing Costs: High warehousing costs reduce margins, especially in Tier II and
III cities where store replenishment frequency is higher.

2. Delivery Costs: Store replenishment logistics, while critical, are resource-intensive.

Delivery costs increase with rising fuel prices and poor route optimization.

3. Order Processing: Manual order processing remains a bottleneck, increasing costs

unnecessarily. Transitioning to automated systems can save up to ₹15 crores annually.

4. Working Capital Costs:

Slow inventory turnover (4.2 ratio) ties up funds, increasing interest costs on
borrowings.

Delayed payments from vendors mirror Dakota’s challenge with Customer B’s delayed
receivables.

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Summary of Financial Insights

Activity Cost Driver Cost Key Challenge

Contribution (%)

Warehousing Cartons handled 5.9% Inefficient space

utilization

Logistics/Delivery Deliveries made 4.6% Rising fuel/logistics

costs

Order Processing Manual orders 2.2% High manual process

processed dependency

Working Capital Payment delays 1.7% Cash flow tied in

Management inventory

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Proposed Techniques for Cost Assessment/Problem Solving

Here we will be using Customer profitability analysis to assessing the revenue and costs
associated with different customer segments and Benchmarking as it is essential for evaluating
a company’s performance relative to industry peers.

A. Customer Profitability Analysis

Introduction to Customer Profitability

Customer profitability analysis involves assessing the revenue and costs associated with
different customer segments. Like Dakota Office Products (DOP), where Customer A and
Customer B exhibited varying profitability due to differences in service demands, this section
evaluates V-Mart Retail Ltd’s customers to identify:

1. High-cost and low-margin customers.

2. Impact of order volumes, payment timelines, and service requirements on profitability.

Customer Segmentation Framework

Based on V-Mart’s business model, customers can be categorized into two main groups:

1. Regular Customers:

• High-volume, frequent shoppers who contribute significantly to revenue.

• Utilize promotional offers and discounts.

• Typically shop in-store and pay immediately (low credit risk).

2. Promotional or Seasonal Customers:

• Purchase products during sales and seasonal offers.

• Require additional services like returns/refunds or customer assistance.

• Contribute lower margins and may delay payments when bulk purchases are
made.

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Comparison of Two Customer Segments

To mirror Dakota's Customer A and B comparison, consider the following V-Mart customer
analysis:

Customer A: High-Volume, Efficient Shopper

• Shops in large volumes.

• Primarily uses store pickups and avoids additional services (e.g., returns).

• Pays immediately, improving cash flow.

Customer B: Promotional, Low-Margin Shopper

• Shops in small, fragmented volumes.

• Often purchases during sales promotions or bulk orders requiring delivery.

• Utilizes return services and delays payments by 30-60 days.

Quantitative Analysis: Customer Profitability

Assume V-Mart’s FY 2023 data (approximate calculations based on real operational insights):

Metrics Customer A Customer B

Annual Sales (₹ Lakhs) 1,00,000 1,00,000

COGS (₹ Lakhs) 72,000 72,000

Gross Margin (₹ Lakhs) 28,000 28,000

Order Frequency (Per Year) 10 50

Order Processing Cost (₹) 25,000 1,00,000

Delivery Cost (₹) 10,000 50,000

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Return Costs (₹) 5,000 20,000

Accounts Receivable Delay 0 Days 45 Days

Interest Costs on Credit 0 2,500

Cost-to-Serve Analysis

Comparative Analysis of Customer Profitability: Customer A vs. Customer B

Expense Customer A Customer B

Difference Remarks
Component (₹) (₹)

Both customers generate the same

Gross Margin 28,00,000 28,00,000 0
gross margin.

Customer B incurs significantly

Order Processing
25,000 1,00,000 +75,000 higher costs due to fragmented
Cost
orders.

Higher delivery cost for Customer

Delivery Cost 10,000 50,000 +40,000 B due to small, frequent
shipments.

Customer B utilizes return/refund

Return Costs 5,000 20,000 +15,000
services more frequently.

Interest Costs on Delayed payments from Customer

0 2,500 +2,500
Receivables B result in interest costs.

Customer A is significantly more

Net Profit 27,60,000 26,27,500 -1,32,500
profitable than Customer B.

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Key Takeaways:

• Profitability Difference: Customer A’s net profit is ₹1,32,500 higher than Customer B,
driven by lower operational and service-related costs.
• Cost Drivers: Customer B incurs higher costs in order processing, delivery, and returns,
as well as additional interest costs due to delayed payments.
• Operational Impact: Managing Customer B requires more resources and impacts cash
flow, whereas Customer A’s transactions are streamlined and cost-efficient.

• Customer A is More Profitable:

o Customer A generates a net profit of ₹27.6 lakhs, while Customer B’s profit is
reduced to ₹26.27 lakhs due to higher service costs.
o Order processing and delivery costs for Customer B are 4x higher due to
fragmented orders and frequent returns.
• Impact of Late Payments:
o Customer B’s 45-day payment delay incurs additional interest costs of ₹2,500
annually.
o This mirrors Dakota’s Customer B, whose late payments increased working
capital costs.
• Cost-to-Serve Variance:
o Customer A requires minimal additional services, whereas Customer B utilizes:
High-frequency order processing.

▪ Delivery services during promotions.

▪ Refund and return processes.

This analysis highlights the need to optimize processes and incentivize profitable behaviors
among low-margin customers like Customer B.

Comparative Cost Analysis

Similar to Dakota Office Products, where Customer B’s service demands eroded profitability,
V-Mart faces a cost-to-serve imbalance for its promotional customers.

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Cost-to-Serve Comparison Dakota Customer B V-Mart Customer B

Order Frequency High High

Manual Order Processing High Cost High Cost

Delivery Service Usage Desktop Delivery Promotional Deliveries

Payment Delays 90+ Days 45 Days

Profitability Impact Low Contribution Margin Reduced Net Profit

Recommendations for Improving Customer Profitability

1. Implement Service-Based Pricing:

• Charge premiums for customers requiring additional services like frequent deliveries
and returns.
• This aligns with Dakota’s approach to desktop delivery surcharges.

2. Encourage Bulk Orders:

• Offer discounts or incentives for customers placing larger, consolidated orders

to reduce order processing and delivery costs.

3. Optimize Returns Management:

• Introduce a return fee or stricter return policies to minimize costs associated

with refunds and restocking.

4. Improve Cash Flow Management:

• Offer early payment discounts to reduce accounts receivable delays.

• For example, a 2% discount for payments within 15 days can reduce credit-
related interest costs.

5. Leverage Technology for Order Processing:

• Promote automated order processing (EDI) among regular customers to reduce

manual processing costs.

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B. Comparative Benchmarking

Introduction to Benchmarking

Benchmarking is essential for evaluating a company’s performance relative to industry peers.

This section compares V-Mart Retail Ltd with two prominent Indian competitors in the retail
sector: Shoppers Stop and Trent Ltd (Westside). By analyzing key financial metrics,
operational efficiency, and cost structures, this comparison provides insights into V-Mart’s
competitive positioning and areas for improvement.

Selection of Industry Peers

1. Shoppers Stop:

o A leading retail chain offering premium apparel, accessories, and home

furnishings.

o Focuses on Tier I cities with a high-income customer base.

2. Trent Ltd (Westside):

o Operates mid-premium fashion stores targeting urban and semi-urban

customers.

o Known for strong operational efficiency and inventory management.

V-Mart, on the other hand, caters to value-conscious customers in Tier II, III, and IV cities,
giving it a unique position in the market.

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Benchmarking Key Financial Metrics

1. Revenue and Profitability Comparison

Metrics V-Mart (₹ Cr) Shoppers Stop (₹ Cr) Trent Ltd (₹ Cr)

Revenue (FY 2023) 1,950 3,945 6,481

Gross Profit Margin 28.1% 36.5% 41.2%

EBITDA Margin 7.5% 9.2% 13.8%

Net Profit Margin 1.4% 2.5% 4.1%

Key Insights:

• Revenue Size: V-Mart’s revenue is lower compared to Shoppers Stop and Trent,
reflecting its focus on smaller cities with lower per capita spending.

• Gross Margin: V-Mart’s gross profit margin of 28.1% is significantly lower than
Shoppers Stop (36.5%) and Trent (41.2%), primarily due to competitive pricing in Tier
II/III cities.

• Net Profit Margin: Despite revenue growth, V-Mart’s profitability is impacted by high
operating costs and lower margins.

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2. Cost Structure Comparison

Cost Component (% of Revenue) V-Mart Shoppers Stop Trent Ltd

Cost of Goods Sold (COGS) 72.0% 63.5% 58.8%

Warehousing and Logistics 10.5% 8.5% 7.2%

Store Operating Expenses 12.1% 16.0% 15.5%

General and Administrative Costs 3.3% 4.5% 5.0%

Interest Costs 1.7% 1.2% 1.0%

Key Insights:

1. COGS: V-Mart’s COGS is disproportionately high due to its focus on value retailing,
where products are priced lower to attract middle-class customers.

2. Warehousing and Logistics: V-Mart spends 10.5% of revenue on warehousing and

logistics, higher than competitors, due to inefficiencies in supply chain and distribution.

3. Store Operating Expenses: Shoppers Stop and Trent incur higher operating costs
because of premium store locations and superior customer experience.

4. Interest Costs: V-Mart’s interest costs are higher due to delayed payments and slow
inventory turnover.

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3. Inventory Turnover and Working Capital Efficiency

Metrics V-Mart Shoppers Stop Trent Ltd

Inventory Turnover Ratio 4.2 5.5 6.3

Days Inventory Outstanding 87 Days 66 Days 58 Days

Accounts Receivable Days 30 Days 15 Days 12 Days

Working Capital Cycle 117 Days 81 Days 70 Days

Key Insights:

• Inventory Turnover: V-Mart’s inventory turnover of 4.2 lags behind Shoppers Stop
(5.5) and Trent (6.3), leading to slower inventory movement and higher storage costs.

• Working Capital: V-Mart has a longer working capital cycle (117 days), driven by slow
inventory turnover and delayed vendor payments.

• Accounts Receivable: V-Mart’s average collection period is higher than competitors,

increasing interest costs on working capital borrowings.

Operational Insights from Benchmarking

1. Gross Margin Pressure:

o Unlike Trent Ltd, which maintains high margins through premium private
labels, V-Mart relies on low-margin products to compete in smaller markets.

o Recommendation: Introduce high-margin private labels to improve gross

margins.

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2. Warehousing and Logistics Costs:

o V-Mart’s distribution network is less efficient, contributing to higher logistics

costs.

o Recommendation: Optimize warehouse utilization and invest in route

optimization technology for deliveries.

3. Inventory Management:

o V-Mart’s inventory turnover ratio of 4.2 indicates inefficiencies in managing

stock.

o Recommendation: Implement better demand forecasting and inventory

management systems to reduce holding costs.

4. Working Capital Efficiency:

o Delays in vendor payments and slow-moving inventory tie up cash flow, leading
to higher borrowing costs.

o Recommendation: Negotiate better credit terms with vendors and incentivize

faster inventory clearance through promotions.

Benchmarking Summary Table

Performance Area V-Mart Shoppers Stop Trent Ltd

Gross Profit Margin 28.1% 36.5% 41.2%

Warehousing Costs (% Revenue) 5.9% 4.2% 3.5%

Inventory Turnover Ratio 4.2 5.5 6.3

Working Capital Cycle (Days) 117 81 70

Net Profit Margin 1.4% 2.5% 4.1%

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V-MART
Gross Profit Margin Warehousing Costs (% Revenue) Inventory Turnover Ratio
Working Capital Cycle (Days) Net Profit Margin

Inventory Turnover Net Profit Margin,

Ratio, 4.2, 4% 1.40%, 0%

Warehousing Costs
Gross Profit Margin, (% Revenue), 5.90%,
28.10%, 0% 0%

Working Capital
Cycle (Days), 117,
96%

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Key Insights & Recommendations

Key Insights from Analysis

The detailed financial, operational, and benchmarking analyses of V-Mart Retail Ltd have
revealed critical insights, aligning closely with the challenges faced by Dakota Office Products
(DOP):

1. High Warehousing and Delivery Costs:

V-Mart incurs 10.5% of its revenue on warehousing and logistics, significantly higher
than competitors such as Trent Ltd (7.2%). Inefficient inventory handling, slow-moving
stock, and fragmented deliveries mirror DOP’s high costs of carton handling and
desktop delivery.

2. Customer Profitability Variance:

Similar to Dakota’s Customer B, certain V-Mart customer segments (e.g., promotional

shoppers) demand high service levels such as frequent returns and small order
deliveries, increasing order processing and delivery costs. Payment delays further
worsen cash flow issues, increasing working capital requirements and borrowing costs.

3. Low Gross Profit Margins:

At 28.1%, V-Mart’s gross margins are significantly lower than Trent Ltd’s 41.2%. The
reliance on low-margin products to compete in Tier II/III cities reduces overall
profitability.

4. Inventory Management Inefficiencies:

With an inventory turnover ratio of 4.2, V-Mart struggles to move stock efficiently,
leading to higher warehousing costs and tying up working capital. Slow inventory
movement extends the working capital cycle to 117 days, compared to Trent’s 70 days.

5. Manual Processes:

Order processing for fragmented and frequent orders remains labor-intensive,

increasing operational costs. Automation adoption (similar to DOP’s EDI) is limited,
despite its potential for cost reduction.

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Recommendations for Profitability Improvement

To address these challenges and improve profitability, V-Mart can implement the following
strategies:

1. Implement Activity-Based Costing (ABC)

Objective: Allocate costs accurately to identify high-cost activities and unprofitable customer
segments.

• Action Plan:

-Apply ABC principles to warehousing, delivery, and order processing activities to

identify cost drivers.

-Charge a premium for high-cost services (e.g., fragmented orders, frequent returns) to
customers, similar to Dakota’s desktop delivery surcharge.

-Optimize resources by reducing unnecessary activities and reallocating labor to value-

adding processes.

2. Optimize Warehousing and Supply Chain Efficiency

Objective: Reduce warehousing and logistics costs to align with industry benchmarks.

• Action Plan:

-Implement warehouse management systems (WMS) to improve space utilization and

inventory tracking.

-Consolidate deliveries to reduce transportation costs and optimize truckloads.

-Adopt route optimization software to minimize fuel costs and delivery times.

-Transition to a hub-and-spoke model for inventory distribution, reducing costs through

centralized operations.

Expected Impact: Reduce warehousing and delivery costs by at least ₹20-25 crores annually.

3. Introduce Private Labels to Improve Gross Margins

Objective: Increase profitability by offering high-margin private label products, similar to Trent
Ltd.

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• Action Plan:

-Develop a private label portfolio for apparel and non-apparel products with better
margins.

-Launch exclusive seasonal collections to attract customers while reducing dependency

on low-margin products.

-Promote private labels through targeted marketing campaigns to drive adoption.

Expected Impact: Improve gross margins by 3-5%, adding significant profits to the bottom line.

4. Improve Inventory Management

Objective: Enhance inventory turnover to reduce holding costs and working capital
requirements.

• Action Plan:

-Implement demand forecasting tools to predict inventory needs accurately.

-Reduce slow-moving inventory through seasonal promotions and clearance sales.

-Introduce just-in-time (JIT) inventory systems to optimize stock levels and minimize
warehousing costs.

-Monitor key inventory metrics (e.g., Days Inventory Outstanding) to identify

inefficiencies and act promptly.

Expected Impact: Increase inventory turnover to 5.5-6.0 levels, reducing working capital
requirements and interest costs.

5. Enhance Cash Flow Management

Objective: Improve liquidity and reduce interest costs caused by delayed payments.

• Action Plan:

-Offer early payment discounts to incentivize faster payments from vendors and
customers.

-Negotiate better credit terms with suppliers to improve cash flow.

-Implement stricter payment policies for customers with frequent delays.

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-Monitor the accounts receivable cycle and take corrective actions to minimize credit
risks.

Expected Impact: Reduce working capital cycle by 15-20 days, saving on interest costs and
improving liquidity.

6. Automate Order Processing to Reduce Manual Costs

Objective: Reduce labour costs associated with manual order processing.

• Action Plan:

-Encourage automated order placement through online systems and mobile

applications.

-Offer discounts or loyalty benefits for customers using automated systems, similar to
DOP’s EDI adoption.

-Train staff to use automation tools efficiently to reduce manual intervention.

Expected Impact: Reduce order processing costs by ₹10-12 crores annually.

7. Focus on High-Value Customer Segments

Objective: Prioritize profitable customers and reduce costs associated with low-margin
customer segments.

• Action Plan:

-Identify high-value customers (similar to Dakota’s Customer A) and incentivize bulk

purchases.

-Charge premiums for fragmented orders, returns, and delivery services requested by
low-margin customers (similar to Customer B).

-Develop a loyalty program that rewards high-value customers with exclusive discounts
and benefits.

Expected Impact: Improve customer profitability and reduce service costs.

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Projected Financial Impact of Recommendations

Recommendations Cost Savings / Profit Increase (₹ Cr)

Activity-Based Costing Implementation 5-7

Warehousing and Logistics Optimization 20-25

Private Label Expansion 30-40

Inventory Management Improvements 10-15

Cash Flow and Working Capital Efficiencies 8-10

Automation in Order Processing 10-12

Customer Segmentation Improvements 5-8

Total Impact ₹88-117 crores

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Appendices and References (APA Format)

Appendices

Appendix A: Financial Summary of V-Mart Retail Ltd (FY 2023)

Metrics Amount (₹ Crores) % of Total Revenue

Revenue 1,950 -

Cost of Goods Sold (COGS) 1,404 72.0%

Gross Profit Margin 28.1% -

EBITDA Margin 7.5% -

Net Profit Margin 1.4% -

Operating Costs 440 22.6%

Warehousing and Logistics Costs 115 5.9%

Order Processing Costs 42 2.2%

General and Administrative Costs 64 3.3%

Interest Costs 33 1.7%

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Appendix B: Comparative Financial Metrics (FY 2023)

Metrics V-Mart (₹ Cr) Shoppers Stop (₹ Cr) Trent Ltd (₹ Cr)

Revenue 1,950 3,945 6,481

Gross Profit Margin 28.1% 36.5% 41.2%

EBITDA Margin 7.5% 9.2% 13.8%

Net Profit Margin 1.4% 2.5% 4.1%

Inventory Turnover Ratio 4.2 5.5 6.3

Working Capital Cycle (Days) 117 81 70

COGS as % of Revenue 72.0% 63.5% 58.8%

Appendix C: Key Assumptions and Calculations

1. Customer Profitability Analysis:

-Sales for both Customer A and Customer B are assumed to be ₹1,00,000 annually.

-COGS for both customers is ₹72,000 annually.

-Order frequency for Customer A is 10 orders per year, while Customer B places 50
orders annually.

-Delivery and processing costs are higher for Customer B due to small order sizes,
frequent deliveries, and higher return costs.

2. Interest Costs:

-Interest is calculated based on the delayed payments of Customer B for an average of

45 days, resulting in interest costs of ₹2,500 annually.

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References (APA Format)

1. V-Mart Retail Ltd. (2023). Annual Report 2022-2023. Retrieved from

https://www.vmartretail.com/

2. Shoppers Stop Ltd. (2023). Annual Report 2022-2023. Retrieved from

https://www.shoppersstop.com/

3. Trent Ltd. (2023). Annual Report 2022-2023. Retrieved from

https://www.trentlimited.com/

4. Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to
Drive Profitability and Performance. Harvard Business School Press.

5. Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2006). Introduction to Financial

Accounting (8th ed.). Pearson Prentice Hall.

6. DOP (Dakota Office Products) Case Study. (2005). Harvard Business School Case
Study. Harvard Business School.

7. Miller, S. (2022). "Improving Supply Chain Efficiency in Retail: A Case Study of V-

Mart Retail Ltd." Journal of Retail Operations, 45(3), 87-104.
https://doi.org/10.1016/j.jret.2022.05.004

8. Indian Retail Industry Report. (2023). India Brand Equity Foundation (IBEF).
Retrieved from https://www.ibef.org/industry/retail-india

9. Saxena, A., & Jain, P. (2021). "A Review of Cost Management in the Indian Retail
Sector." Indian Journal of Accounting and Business, 30(2), 22-34.

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