The retail chain goes in for large-format stores.
NEXT, the consumer durables, electronics and IT (CDIT) retail chain of the Videocon group, is opening a 10,000 square feet outlet in West Delhi next month. Last month, the retail chain opened a 6,000 outlet in Navi Mumbai. So what’s the big deal when every other retail chain is opening stores?
It’s a big deal indeed for NEXT, which has so far been concentrating on comparatively smaller stores of around 2,500-4,000 sq ft. Though it has the largest number of stores (589) and is the oldest CDIT retailer (started operations in 2003), new entrants such as Tata’s Croma, Future Group’s Ezone and Reliance Digital among others have marched ahead with larger stores of 10,000 to 15,000 sq ft. These stores offer superior ambience as well.
Sunil Mehta, chief executive of NEXT, admits that the earlier strategy was “not to intimidate” customers by opening huge stores. “But now our philosophy has changed and we are opening bigger stores. Our stores now also have better product mix. And the ambience is as good if not better than that of others,’’ Mehta adds.
He also makes it a point to say NEXT is one of the very few CDIT retailers which are profitable. It made profits of Rs 1.3 crore in FY 2010. In comparison, Croma is expected to achieve breakeven by early FY 2012 and Reliance Retail, the parent of Reliance Digital, is expected to become profitable in a year or two.
Scaling up is just one among many measures NEXT is taking to take the next leap. For instance, it has marked-down sales inventory (goods which are sold on discount) of less than five per cent compared to an average 20 per cent in the industry. Mehta says the chain is one of the few retailers which have implemented enterprise resource planning (ERP) by SAP on both the front end and back-end of operations.
Unlike other CDIT retailers, NEXT is following a strong franchisee model to expand its reach. Out of 589 stores, 200 are company-owned, and the rest are franchisee owned. Among the 200 upcoming stores, 70 per cent are franchisee-owned and the rest company owned.
NEXT has also tied up with Star Bazaar to provide shop-in-shops in its recently opened store in Aurangabad and is also talking to Shoppers Stop to provide the same.
That’s something others have taken note of. Rating firm Fitch says NEXT has reported positive cash flows from operations on the back of an increased focus on the franchisee model wherein part of working capital risks are covered by minimum guarantee contracts.
“The ratings also reflect the increase in the company’s sales, 35 per cent y-o-y growth in FY 2010 as well as improvements in key store level operating metrics – higher average sales per square foot per annum and higher gross margins,” Fitch says, in its September note.
But there are concern areas as well. Fitch says leverage levels are expected to remain high given significant inventory requirements and capex plans.
Capex constraint is the reason why the chain would open only 200 stores instead of targeted 300 new stores by FY 2011.
Mehta, however, is bullish and thinks efficient inventory management and cost control have helped the chain to perform better. Like others, NEXT is of course banking heavily on private labels, which account for 15 per cent of sales in a category. It has half-a-dozen products in colour television, LCD TVs and audio segment under the NEXT and Hyundai brand names and will soon launch products in refrigerators, washing machines and air-conditioners. Private labels in consumer durables and electronics fetch gross margins of 15 per cent compared to lower margins given by big brands.
Mehta says reach, service and pricing are the three biggest differentiators for NEXT’s private labels as they are available in the neighbourhood of customers in even B and C centers.
