After experimenting with multi-format retailing, RPG group’s Spencer’s Retail has realised that larger stores tend to be more cost efficient
“In the last few quarters, our learning has been that smaller stores may be good from neighbourhood catchments and convenience point of view, but they are not really good for generating top line to cover costs and contribute to margins,” says Vineet Kapila, president, Spencer’s.
Rents have been going up — that’s another argument for having large format retail. Indeed, retail store rentals per square foot in the outskirts of neighbourhoods can cost less than half of those in a downtown mall. Located away from high streets, larger stores tend to be more cost effective; marketing costs too become more efficient, probably by a factor of up to 25 per cent, according to estimates.
In keeping with its new game plan, Spencer’s is working on adding about 3 lakh square feet by the end of 2011-12, and the new additions, as intended, are in the hypermarket space. The company has added about 1 lakh square feet of space in the first couple of months this fiscal. “Keeping the correct mix of rentals and location, we are open to venturing into all geographies. The format of the hyper-store will change based on geography but will remain in the 15,000 to the 40,000 square feet area,” Kapila adds.
Sharad Mehra, senior vice-president, Technopak Advisors, says the gambit is likely to pay off. “The convenience and economy that the hypermarkets will provide will make them work,” he explains. “Retailers will be able to have a sharper product mix and sharper supply chain making them more competitive. However, the biggest boost will come from development of infrastructure and public transport that will enable the hypermarkets to be located at the right place.”
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Spencer’s Retail runs on two formats. This includes Spencer’s Hyper with over 15,000 sq ft for hypermarkets and Spencer’s, the small format retail stores with an area size of 2,000 sq ft to 10,000 sq ft. Currently, Spencer’s Retail operates 220 stores, down 148 from 368 stores, which the company had in 2008. Of these, 200 operate on the supermarket model and 20 as hypermarkets. Most stores which have been closed down were supermarkets. It goes without saying, going forward, all new expansion and growth will be witnessed in the hypermarket space.
“The larger formats come at lower rentals, we are able to offer better product ranges to consumers and in the process, make better margins which can cover costs and overheads,” Kapila admits.
Rethink, repeal
The rethink in strategy comes on the back of losses that have continued unabated since 2006, when the Spencer’s brand was reborn under the RPG umbrella (the first new store under the Spencer’s brand name inaugurated in West Mambalam, Chennai, that year) and the need for rationalisation following the 2008 economic slowdown.
In 2010-11, the company posted losses of about Rs 130 crore, significantly lower than the Rs 220 crore losses it recorded in 2009-10. In 2008-09, at the height of the economic slowdown, Spencer’s losses had mounted to a huge Rs 520 crore. Kapila says that the company’s problems were a result of its ambitious expansion plans — opening of too many stores too soon — an issue which the company hopes to resolve with its new expansion plan.
Analysts support the view, and see hypermarkets as a trend that is here to stay, as they make more business sense than the small format supermarket. “All retailers are increasingly looking at hypers as the next expansion frontier, given that costs per unit of sales are more reasonable. The format is able to attract more weekend crowd and they have better invoiceable value,” explains Pinakiranjan Mishra, partner, retail & consumer practice, Ernst & Young.
Competitors in the space, namely, Reliance Retail and Aditya Birla More, are also eyeing a ‘hyper’ expansion, given the length and breadth of merchandise that is allowed by the format. Thomas Verghese, CEO, Aditya Birla Retail’s more, says that by the end of the financial year, the chain will add 12 hypermarts to the 10 that are operational. He says hypermarts are capable of housing 25,000 stock keeping units (SKUs) as opposed to supermarkets that can house up to 4,000 SKUs.
Verghese, however, emphasises the enduring importance that supermarkets retain in the more portfolio. In addition to the existing 560 supermarkets, more will add 150 by the end of the fiscal, he adds. “While hypers have their advantages given that supermarkets have to function through segmented suppliers, the issues of mobility and infrastructure that continue to plague India will mean that smaller supermarkets will keep their importance. The supermarket remains vital because it has the neighbourhood shop advantage,” Verghese says.
RPG’s experience with multi-format Spencer’s retail also imparted important lessons on supply chain and inventory management along with an overall understanding of how the format would be made profitable.
The first of these was to grow organically rather growth on the back of any addition in store space. “In the past we tried to grow by adding more space, which did not work. The important thing is to see if we are growing on the same store basis — till date this fiscal we are growing at 18 per cent. Add to this the new stores, and we are looking at a 48 per cent growth this fiscal. This is the real metric of a retailer’s performance,” claims Kapila. Last fiscal, Spencer’s grew at 14 per cent.
Kapila’s optimism is understandable, given the boom in the organised retailing segment. Says Mehra of Technopak, “Organised retail will three times in value from the current $22 billion to an estimated $66 billion over the next five years.” Some other industry reports also point at a similar growth trajectory.
A 2011 report by Business Monitor International predicts that the mass grocery retail sales in India would grow by 218 per cent and reach $ 27.67 billion by 2015. Also, according to a Knight Frank India report, between 2010 and 2012 about 55 million sq ft of retail space will be available in the national capital region, Mumbai, Bangalore, Chennai, Kolkata, Pune and Hyderabad. Moreover, over the next two years, organised retail real estate stock will more than double from the current 41 million sq ft to 95 million sq ft. Keeping the growth potential in mind, Spencer’s is looking at adding 1 million sq ft retail space by 2013.
Some analysts, however, argue that the large hypermarket format, while conceptually sound, has problems associated with implementation. First, given the large space requirements, hypermarkets cannot be located in the centre of the city or shopping high-streets. The location may not always be convenient for consumers, adversely affecting footfalls.
“The space constraints associated with hypers necessitate that they be located on the outskirts which automatically spells inconvenience. On the other hand, if located in malls, the high rentals pose significant pressures on the retailers’ margins,” says Bijou Kurien, president and chief executive, lifestyle, Reliance Retail.
Reliance Retail currently has 16 hypermarkets, but according to Kurien, there is no greater or lesser importance associated with the format than any of the other 20 retail formats that Reliance Retail currently operates in. “Besides space, the escalators/travellators that need to be installed when hypermarkets are spread over multi-storeys take up space and one ends up renting space which is ultimately left unused,” he said.
Space project Kapila says that the biggest problem before the company was that Spencer’s had more stores than was manageable, which necessitated shutting down the unviable ones. The closures have been ascribed to bad choice of location, poor logistical support, lack of parking space and other operational issues. “People had exuberant expectations around the top line, and expanded too much. However, consumer habits take time to change and shopping in a modern retail format was new for the Indian consumer. Capexes done to open stores were on the higher side, which led to fast cash burn,” Kapila explains.
Spencer’s has also tightened inventory levels, cut costs on the supply chain and is now focused on correct management of rentals and assortment merchandising. He is also quick to rattle off statistics on cost management at Spencer’s. He puts the supply chain cost at 1.8 per cent of the business — by far the lowest in India — where the global standard is 1.5 per cent.
Also, where store operating expenses are concerned, Spencer’s now stands at sub-Rs 1,000 per sq ft, which Kapila claims is a feat of sorts. “It is a result of these learnings; we have already broken even on store basis and hope to break even on a corporate basis by the middle of 2013,” Kapila says. Spencer’s worked on the margins from each category to build top line. The chain will see its gross margins moving up 150 basis points in 2011-12, he adds.
The company was also able to cut losses by drastically shutting down stores starting 2010, along with other cost-cutting measures that reduced expenses by 25-30 per cent. Analysts say that the change in strategy was necessitated by the fact that the company needed to double its turnover by 2013 to break even. According to a report from the brokerage IIFL, for Spencer’s store level break-even is a key milestone, but the company will continue to have to walk a tight rope if it has to implement the larger turnaround strategy.
Spencer’s is also looking at expanding its private labels so that by mid-2013, the share of private labels to its overall revenues increases from the current 16 per cent to 25 per cent. “Private labels contribute 16 per cent to our overall revenues, ranging from 40 to 3 per cent for different categories. But we believe by mid-2013, private labels will contribute 25 per cent to our revenues. As we gain scale with more stores and floor space, we hope to get better terms where private label development and cost structure is concerned,” Kapila says.
| SCALING UP | |||
| Rival retailers | Holding company | No. of outlets | Expansion plan |
| more | Aditya Birla | 570 | Add 10 hypermarkets, 150 supermarkets by end 2011 |
| Pantaloons, Big Bazaar, Food Bazaar | Future Group | Over 1,000 | Add 250-300 stores across formats in 12-18 months |
| Reliance Fresh, Trends, Lifestyle, Hyper | Reliance Retail | Over 1,000 | Add 150-odd stores by end 2011 |
| Industry estimates | |||
Describing the private labels business as one for the long haul, Kapila says Spencer’s will focus on the staples/commodities segment as opposed to merchandise and fast moving consumer goods (FMCG) because brand loyalty is as good as absent in this segment. “Categories where there is a high commodity play will make it easier for private labels to move in faster than categories where there is branded play. For instance, in FMCG, there are strong national brands, and therefore, private labels will take a longer time to catch on. In categories like general merchandise, apparel, staples, where there is more commodity play, private labels can replace the existing products with very little downside to retailers,” Kapila explains.
The difficulty here would be to choose the correct mix of vendors who are able to deliver quality; then scale to extract better pricing, besides a large enough profit pool to make it sustainable in the long term. Analysts also say that for large format retailers, building a repertoire of private labels is important to drive footfalls by offering consumers a range of relatively cost-effective options to choose from. “Private labels will play a key role in driving the profitability in the case of hypermarkets,” says Mehra of Technopak. “In private labels the margins are better and there is greater flexibility in managing the sale. Every large retailer in India is therefore focusing on developing its own labels and creating a stronger identity for its brand to be able to take on established brands in the space.”
From the looks of it, Spencer’s has seen through the crunch but it is not yet above waters. In the next round of expansion, its biggest concern is likely to be financing — but that’s a common concern for all the other big retailers.