Even as critics write off Shopper's Stop, the retailer has its counter moves in place.
Eighteen years after it set up India’s first lifestyle superstore in Mumbai, the plot seems to have gone off-script for Shopper’s Stop. Research analysts have offered a grim prognosis. A recent report put out by research firm Macquarie says that the Raheja Group company will remain under pressure for at least three or four quarters more. Some others feel it has lost focus over the years and as a result doesn’t have a “wow” element to differentiate it from others.
The numbers indeed are grim. Same-store sale was down 3 per cent in the quarter ended March 2009. In the same quarter last year, it was up 20 per cent. For the quarter, Shopper’s Stop posted sales of Rs 346.8 crore, compared to Rs 319.5 crore during the same period last year, an increase of 9 per cent. However, gross margins fell from 30.2 per cent to 28.9 per cent. Meanwhile, operating expenses shot up during the quarter from Rs 87 crore to Rs 92.7 crore. As a result, the company swung to a loss of Rs 14.1 crore from a profit of Rs 3.7 crore last year.
There’s more. In February, the company shuttered its bookstore, Crossword, at the Mumbai airport and Shopper’s Stop stores in Chennai and New Delhi. Its retail store at the Mumbai airport, Stop & Go, met with the same fate. Shortly before, it exited Argos and Brio, the food and beverage format. “These businesses were not performing. Some of them were located in the wrong place. So, it was not viable anymore,” says Shopper’s Stop Chief Executive Officer Govind Shrikhande.
These are the symptoms. Sector experts say its merchandise strategy is not in sync with the current painful times. Almost 80 per cent of its revenue comes from large brands which have lengthy sale cycles; therefore, unsold inventories result in massive mark-downs. To get over this problem, most retailers have begun to migrate to private labels. In most categories, private labels are 25 per cent cheaper, yet the profit margins are as high as 30 per cent. This is because these are sourced directly from producers, which cuts out the intermediaries. Two, no brand premium needs to be paid to the supplier.
At present, private labels contribute only about 20 per cent of Shopper’s Stop’s revenues. This figure is way below what other retailers have done. Curiously, it has also reduced its private label mix from 20.2 per cent to 19.9 per cent. The assumption was that the rich would continue to spend freely even in tough times. Of course, then no one had anticipated the intensity or longevity of the downturn.
Falling footfalls
Last year’s mammoth rebranding exercise, which cost the company close to Rs 12 crore, has finally caught up with it. In a bid to become a more fashionable brand, Shopper’s Stop brought in several domestic and international brands that would cater to younger consumers between the ages of 18 and 25. Following that, it bombarded the tube with advertisements of its new positioning. “The huge write-downs, rebranding exercise, high rentals and losses on Agros have really hurt the company,” Raghav Sehgal of Angel Broking says.
Shrikhande admits that walk-ins are down. “Typically, window shoppers have dropped and purchase from categories which are non-essential is definitely being deferred,” says he. Customer entry at Shopper’s Stop stores decreased 15 per cent in the quarter ended March 2009. For the entire year (2008-09), customer entry was down 11 per cent. Shrikhande says that more serious shoppers walk into the store now and that the bridge and luxury brand sales have grown 40 per cent. The conversion ratio (walk-ins to sale) was up 4 per cent in the last quarter (January to March 2009) compared to the same quarter a year ago. For the whole year, the conversion ratio rose 3 per cent.
Another positive for the retailer is that its store sales are still robust. Most retailers have seen erosion of almost a third in sale for every square feet of retail space they own. Upmarket chains have seen it drop from around Rs 1,500 to Rs 1,000, while value retailers like Vishal have fallen from Rs 600 to Rs 400. For Shopper’s Stop, current sale per square feet stands at Rs 1,898, down less than ten per cent from Rs 2,161 a year ago. If all store formats (it also runs furniture and home decor stores, bookshops, cafés and restaurants) are included, sales have fallen around 14 per cent from Rs 2,080 per square feet to Rs 1,809 per square feet.
Clearly, this is a strength that Shopper’s Stop can build on. On his part, Shrikhande expects sales to pick up by Diwali in October with a stable Government in place in Delhi. Urban consumers have cut lifestyle expenditure drastically in the wake of the slowdown and the stock market meltdown. Most estimates suggest that the market as well as the real economy could improve in the quarters to come.
Shrikhande and his team know that it would not be correct just to wait for consumer sentiment to improve. “Expansion and scale hold the key to success in this business. This is what has worked well for Pantaloons, which is very good at diluting its stake consistently when it needs to expand,” says an investment analyst. The benefits of scale are well-known — it helps negotiate better prices with real estate developers as well as vendors.
Expansion plans
Shopper’s Stop has plans to expand, though these have been scaled down, thanks to the tight liquidity in the money markets. “Where we were earlier looking to open six or seven stores a year, now we’ll open four or five stores,” says Shrikhande. In 2009-10, the company intends to cut the ribbon on four stores in Bangalore, Ahmedabad and Hyderabad. Then next year, it will open more stores in Bangalore, Amritsar, Ludhiana, Coimbatore, Vijaywada, Jalandhar, Gurgaon and Pune. By the end of the year, it plans to run 39 stores across the country, up from 27 at present.
The average size of the new stores will be about 56,000 square feet. This will take the total retail space with Shopper’s Stop from 2 million square feet to 2.67 million square feet — an improvement of a third. Still, it will be way short of rivals. Kishore Biyani’s Pantaloons, for instance, has a whopping 12 million square feet of retail space. But Shopper’s Stop is better off than Westside, which has only about a million square feet.
For each of these stores, Shopper’s Stop has capital expenditure to the tune of Rs 8 crore lined up, while stock investments will cost anywhere between Rs 6 crore and Rs 8 crore. The total investment that the company is making to gain size thereby adds up to almost Rs 192 crore. In current times, this is a large sum of money and Shrikhande and his men cannot afford to go wrong.
According to retail specialist V Rajesh, who has worked across formats and has dealt with brands like Spencer’s, Foodworld and Musicworld, the profit margins for retailers have typically been 18-19 per cent, which are good enough to cover the three biggest costs of rent, manpower and energy which add up to around 13-14 per cent of the merchandise retail price. When real estate developers raised prices, their contribution rose to almost 16 per cent. This played havoc with the profit margins of retailers.
Rental pain
The dilemma is particularly bad for Shopper’s Stop which has been positioned as a top-end brand. This means it cannot set up shop in down-market locations. “Stores like Shopper’s Stop have to be located in high street areas and sadly high street rentals are not down. Even if they are, it’s a marginal decrease,” says Sehgal of Angel Broking. As a result, the company was able to pare rental costs by just 50 basis points to 10 per cent in 2008-09. In comparison, several retailers have shut unviable stores, moved to cheaper locations, cut rent though some tough negotiations and consolidated warehouses.
Rentals are generally negotiated before the start of construction and these rates are fixed for at least two years. If the market improves, the retailer gets the benefit. If the market falls, the developer benefits and the retailer gets to hold the can. Several Shopper’s Stop stores were opened when the rentals on retail store were high. Thus, the store has no option but to stay locked in to these high rates. Some of these losses Shopper’s Stop has been able to cut after it shut down some stores. But more needs to be done.
The recent reduction in mall rentals bodes well for the retailer. According to a report by global real estate consultancy Cushman & Wakefield, rentals in some malls in Mumbai have plunged as much as 42 per cent, while certain malls in Delhi have taken a hit of about 17 per cent. No wonder, Shrikhande is confident some of the stores will see a 10-15 per cent drop in rentals in the near future.
Cost-cutting
Meanwhile, Shrikhande and his team have moved to cut other expenses. Consumption of power, for instance, has been brought down 9 per cent. Shopper’s Stop has also cut other expenses like travel and the brass has taken a significant pay cut. Rajesh warns against cutting staff to control costs as it immediately impacts service at the stores. At a time when customers are spoilt for choice, a retailer like Shopper’s Stop cannot afford to be lax on service.
To dig itself out of this mess, the company is exploring the possibility of joint planning with vendors to help improve cash flows. It is also keen to create a new experience at the stores. Based on customer research reports, it has altered the trial rooms and made them better-lit and roomy. Within the stores too, it is creating satellites that will help shoppers see the store from end to end so that wherever one stands there will be an attraction point.
On the customer front, it has begun to offer more branded stuff in segments that are doing well. A case in point is the cosmetics segment where sales are growing at the rate of 17 per cent per annum. (Incidentally, sales in traditional categories like men’s and women’s apparels are down 2 per cent and 1 per cent, respectively. The non-apparel segment that consists of home, leather, watches, jewelry, electronics and personal accessories is up just 2.5 per cent.)
Focus is also being given on customers who buy frequently from the company’s stores. For instance, the contribution of the First Citizen (Shopper’s Stop membership card) to sales went up from 65 per cent in 2007-2008 to 72 per cent in 2008-2009. What’s more, the average ticket size of First Citizen members has grown 5 per cent in the last one year.
“Out of our 20 million customers, it is these one million club members who matter the most,” Shopper’s Stop Managing Director BS Nagesh had told the strategist a year ago. Clearly, the focus has started to show results.
