Beyond The First Three Rules Of Retailing

RETAILING/STUDY IN FAILURE

If the first three rules in retailing are location, location and location, Nanz appears to have got it just right. It had the right stores in the right places - places where well-heeled customers would come to buy things at a premium; places like South Extension and Greater Kailash, representing some of New Delhi uppercrust areas.

But Nanz is out for the count today, after struggling for nearly a decade with low business volumes and turnover. Why did a chain with three high-profile backers fail in an industry that has seen a boom in the last decade? The answer, in one sentence, is simple: getting a couple of rules of the game right is not enough if you get the rest of them horribly wrong.

Take an example from the airline industry. Damania Airways went into the airline business thinking that service is the key to customer acquisition and retention. True, and customers flocked to Damania. The airline was widely applauded for being strongly customer-focused. But it got one crucial thing wrong: costs. To get off the ground quickly, it had leased older aircrafts to save on costs. But these aircrafts proved to be white elephants as running costs and fuel consumption made the airline unviable.

In contrast, Jet Airways went in for some of the newest and most fuel-efficient aircrafts in the business and came up trumps. To say that service holds the key to success in the passenger airline business was, thus, only a half-truth. You've got to get many other things right, too.

The Nanz story shows that good parentage itself cannot guarantee success, if you get some local issues wrong. The Nandas, Helmut Nanz - head of multi-billion German retail chain - and Don Marsh, CEO of the US convenience store major, Village Pantry, were all successful in their own fields. These three were equal co-promoters of Nanz Food Products Ltd., the company that operated the Nanz stores in India. Today, they have withdrawn to lick their wounds. Most of them were self-inflicted, as the Nanz case study shows.

THE NANZ CASE STUDY

When Nanz hit the market in 1993, it was considered a bold step into what was then a sunrise industry. In 1997, the chain had projected a turnover Rs100 crore by 1999. But by the appointed date, turnover was less than a fifth of that level, and profits were nowhere visible on the horizon.

With 20/20 hindsight one can say that the Nanz management failed on almost every count. It failed to do its homework, a fact that affected both its cost structures and its target market. It also failed in building effective partnerships with its vendors to ensure an efficient supply chain.

"The reason Nanz failed was because the stores were built on the lines of the promoters' ego and not with consumer needs in mind," says a former senior executive of Nanz Foods Products.

The problem began right from the groundwork. Nanz chose to start its chain in Delhi, where its Indian promoters, the Nandas, are based. But this proved to be a bad decision because of crippling real estate prices.

"Real estate was the main killer," admits BR Kapoor, executive director, Goetze (India) Ltd. - the Nanda group company that backs Nanz Food Products Ltd.

In contrast, RPG group's Foodworld opened in Bangalore, Hyderabad, Chennai and Pune, where real estate prices are almost a quarter of those in Delhi.

For one of its first outlets in Delhi's Greater Kailash locality, Nanz was paying as much as Rs 5 lakh for its 10,000 square feet space in 1993. Thus at Nanz, rent accounted for as much as 4 to 5 per cent of gross margins.

This seemed to set the trend. Apart from real estate, says Kapoor, "Three per cent of gross margins was used up in paying power bills." Manpower costs were also high. "If you take around 4 per cent of margins for paying manpower, that leaves very little," he adds.

This pinched because Nanz's margins were pretty low - Kapoor argues that gross margins in food and retailing cannot exceed 14 per cent. But Dipankar Haldar, manager with retailing consultancy KSA Technopak, says that substantial volumes and good management can bring gross margins in the region of 18 to 20 per cent.

But real estate proved to be a bigger killer than Nanz had bargained for. The first Nanz outlet was opened in May 1993 in South Extension in Delhi. Within a year, it was attracting 2,000 customers per day.

But the dream run came to a sudden halt when the Municipal Corporation of Delhi razed the building. Apparently, Nanz had violated building by-laws by taking a lease on residential property. Kapoor claims that the Nanz management was unaware of these irregularities; it had merely leased the property from parties who owned the real estate.

Then in 1998, a part of another Nanz outlet on Pusa Road was demolished because the builder had taken up more are than what was permitted.

VOLUME STAGNATION

Meanwhile, Nanz had another, bigger problem on its hands - the lack of a market. When Nanz Food Products was formed in 1993, the supermarket concept was in its infancy.

Though retail activity started in the mid-eighties, players like Nilgiri and Foodworld were restricted to the south and west. The first Shoppers' Stop outlet opened in Mumbai in 1991. Nanz was the first major food and grocery retail store chain in northern India.

It was, therefore, in direct competition with the kirana shops, which have three distinctive advantages - proximity, service (they offer such convenience as home delivery) and high margins due to low infrastructure costs.

Nanz's ambiance may have been in keeping with the promoters' aim of providing an international shopping experience, but it failed to lure middle class and lower middle class consumers who would help generate volumes to partially neutralise the high overheads.

"While SEC A consumers might feel at home in the upscale ambiance, many others stayed away. They felt that their kirana store offered better bargains. At least, it would not charge them for the air conditioning," says a former senior executive of Nanz Food Products. Adds Halder of KSA Technopak, "SEC A consumers would not be more than 10 per cent to 15 per cent of Delhi's population."

Not surprisingly, Nanz began to have difficulty in expanding volumes. For instance, the average footfall in the Nanz store at the Greater Kailash complex was 300 to 500 per day last year.

The "basket size"- the average purchase per person - was a substantial Rs 600 to Rs 700. But analysts believe that if Nanz had targeted the mass segment, the daily traffic could have risen to 800. While the basket size would have come down, total revenue would have increased. Nanz did try rectify this by setting up 'LoBill" stores - no-frills stores of 1,000 to 2,000 square feet to increase its consumer base. These stores were opened in such middle class "catchment areas" like Noida and Shahdara in 1994.

This format was extended in December 1996 when Nanz established six sub-1,000 square food stores called "Kiryana from Nanz". However, by 1997, two of these had shut shop. The reason: Nanz Kiryana stores did not offer sufficient price differentials from the neighborhood shops.

Moreover, Nanz did little to strengthen customer relationships in a durable manner. Where, for instance, Shoppers Stop has an energetic loyalty program, Nanz launched special promos and went in for some aggressive advertising. But the problem was that these efforts were rarely consistent. Nanz would step up its media presence during the fag end of one month and the beginning of another (from the 25th of one month to the 10th of the next). Such measures only brought temporary relief.

Nanz was also trying to fight the general perception that a supermarket or branded store need not necessarily charge higher prices. Retail chains and supermarkets are successful abroad because people associate them with economy.

Apart from stringent cost controls per square foot of management space, a crucial element to success lies in cost efficiencies in supply management and bulk sourcing.

Nanz did not do this. Typically, retailers source directly from manufacturers instead of distributors. By cutting one link in the chain, they are able to negotiate better bulk discounts.

Kapoor blames manufacturers and large multinationals for not supplying directly, and at discounts, so the chain was forced to source from distributors.

But a former employee says that Nanz did get direct supplies from some companies such as Nestle and Colgate amongst others, but was unable to capitalise on this because it never attained the volumes needed to negotiate significant discounts.

COMPOUNDING PROBLEMS

This compounded existing problems. For instance, Kapoor says, "Outlets in Punjab had to buy from local stockists because of high inter-state taxes." This meant that Nanz stores in Ludhiana, Chandigarh and Patiala could not utilise the stocks in the central warehouse and the chain's expenses continued to mount.

A basic lack of vigilance added to the management's woes with a high degree of pilferage - as much as 6 per of total turnover.

"We managed to bring it down to 3 per cent," says Kapoor. "We did not have closed circuit televisions in the stores. That is why we could not bring the pilferage level lower," he adds. Frisking customers was ruled out as an option since that would have put off people.

The lax standards at the store level were a direct reflection of the management, which was constantly in flux. In eight years, Nanz Food Products has had six CEOs. The first CEO was a German, Andreas Blankenhorn.

RULES FOR THE SHOP FLOOR

Real Estate Consts

Nanz chose to open stores in the high priced retail zone of India - the north. In 1993, it paid Rs 5 lakh a month in rent for its Greater Kailash outlet.

Do Your Homework

Always check the paperwork minutely. Two of Nanz's outlets had to face the wrath of Delhi Municipal Corporation because the outlets violated building bylaws. Nanz officials say they took the leases from the original owners in good faith.

Supermarkets Are A Mass Concept

Nanz's upscale ambiance kept middle and lower class consumers at bay. The original target audience, SEC A consumers with high purchasing power, constitute only 10-15 per cent of Delhi's population.

Partnerships Count

Nanz did not pay sufficient attention to building up partnerships with manufacturers and growers. The chain was dependent on distributors instead of sourcing directly from manufacturers, and so could not offer meaningful discounts to consumers.

Basic Supervision Is Crucial

The chain was also hit by a high degree of pilferage - around 6 per cent of total turnover. This considerably reduced the already tight margins.

After a two-year tenure, Daljit Walia succeeded him. Walia and his successor General S Mehra - both seconded by Escorts - were superannuated. V T Bajaj took over for a short period. In mid-1999, he was succeeded by Sarbajit Ghose. In mid-2000, S K Manchanda, then head of marketing, took over as acting CEO when Ghose resigned.

Despite numerous troubles, Nanz continued to open new outlets and appoint franchisees at an alarming rate. By November 1997, it had 23 outlets in Delhi, its surrounding areas and Punjab, which included 10 franchisees.

However, within a year, Nanz decided to jettison its franchising route and fall back on its original formula of expanding through its company outlets.

This change in plan was necessary because franchisees were losing interest. They were not benefiting, say sources. Franchisees felt that they could get supplies directly from distributors. Sourcing products from Nanz reduced profit margins. As KSA's Haldar puts it, "You can go in for franchisees only when systems and procedures are in place. Otherwise they will follow their own gameplan."

By 1998, the Nanz supermarket chain was down to 18 stores. Earlier targets of opening 50 stores and a turnover of Rs 100 crore by 1999 were proving to be increasingly difficult to achieve.

By 2001, the number of stores had dropped to seven - three in Delhi and one in Faridabad, Noida, Ghaziabad and Patiala respectively. Some stores were close to breaking even on the back of large volumes.

CHANGED PRIORITY

To be fair, part of the reason why Nanz went out of business is that it no longer fitted in with the promoters' overall plans. Nanz of Germany was exiting the retail chain business. The Nandas were going through tough times.

In April 2000, they sold their 24 cent stake in two-wheeler company Escorts Yamaha Motor Ltd to the Japanese partner in a Rs 230 crore deal.

Negotiations to sell Nanz started in June last year. RPG, the Bhartiyas of Vam Organics and Trent Ltd - a Tata Group company that runs the Westside departmental store chain - expressed interest. The decision to close operations was taken after talks with Tatas fell through.

In the end, however, Nanz failed on the most basic issues. As Haldar puts it, "The problem was not that it was ahead of its times. It simply did not have a proper plan and business model."

This article was published in the May 2002 issue of Indian Management