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Size Matters

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Tell us about your recently launched 30,000 sqft store in Bangalore. 

Originally, we were opening around 1 lakh sqft properties. Two years ago, we shifted to 70,000 sqft formats. We refined the model somewhat and signed 50,000 sqft formats. But this is our first 30,000 sqft store. So there are some differences, for instance, two categories, furniture and electronics, are not represented here, and the apparel segment spreads across 4,000 sqft We have changed the look of our fresh produce section to the international tray system. We have a narrower gauge fixture that allows more space. So the choice of food (which is the biggest part of our business) is virtually the same as in our other big stores. We are hopeful that the new model will allow us to roll out more quickly, be more profitable and get us higher returns per square feet. Costs will be much lower as we are taking less space.
The main reason of shifting to this format is the space challenge. Also, a hypermarket can’t pay the rentals that vanilla stores can. We are hopeful that developers who want to see the kind of footfalls a hypermarket brings, will be pleased that they can get the whole experience in a 30,000 sqft store. Hence, it will be a win-win for both the developer and for us.
What were the biggest challenges in this format? 
The biggest challenge was to convince the internal team involved in opening 1,00,000 sqft stores that this could be HyperCity with the same DNA that makes HyperCity great but within a smaller box. Having worked on this format for the last 15 months and waiting for the developer to fi nish the mall, I am pleased with the impact. The reaction from customers and colleagues has been really positive. This moves HyperCity out in the front again.
Moving ahead, are you going to stay with this format and resize your existing stores? 
We still want to have the big boxes where we have a bigger offer, including furniture. In Bangalore, where we have 3 stores, we believe there is space for 10 big boxes (50,000 sqft) and another 8-10 small boxes in the next 5-8 years. Therefore, we see them as complementary. We have also been able to piggyback some of the backstage in the existing larger stores in the city so that the amount of retail space in the 30,000 sqft store is of a much higher percentage than it would have previously been.
Some of our back-room activities and storage are being done in the larger stores. It gives us the opportunity to carry some of the management across the larger and smaller stores. Obviously, putting another store in the same city means that there are no initial marketing costs, and we get some economies of scale on warehousing. We will basically stick to the 50,000 and 30,000 sqft going forward.
We are also in the process of revaluating some of our stores. Our Malad, Mumbai, outlet is a big box and it’s a highly profitable store. But we have had to convert our 1,40,000 sqft store at Amritsar to 60,000 sqft, and it now looks even better. We are looking at resizing two to three more stores by surrendering some of the space back to the developer on a mutually agreeable basis.
How’s business right now? 
Trading during our fourth quarter was encouraging. Customer entry, conversion ratio and basket size went up. Sales grew by 11 percent and the margin is up by 30 basis points. Costs are controlled at more than 4 percent (excluding rent). All things came together to deliver our seventh successive quarter of store level profitability. Our store Q4 EBITDA was Rs 107 lakh compared to Rs11 lakh last year. However, the store EBITDA for FY 13 is Rs 425 lakh as against Rs 38 lakh loss last year.
Food volumes returned in the quarter with sales up by 12 percent and apparel sales grew by 37 percent, increasing to 9.8 percent of sales. So we remain very much on track with our growth strategy.
How do you see the retail environment currently? 
We did see some slowdown last year. One of the positive things of being a hypermarket is that we are in so many segments. We also witnessed a little bit of de-growth in volumes that the FMCG industry also saw. However, we saw incredibly good business in apparel as we are investing in that category. We did good business in home, sports, toys and stationery. Business in electronics especially the larger ticket items was challenging. All said and done, we have got so many segments that if the consumer is feeling the pinch in one particular segment we play on in the other categories. So it’s not a big pain point for us.
Our strategy is clear – choosing more profitable formats that are smaller. It’s also right sizing some of the real estates which we have and playing with the mix of goods.

How is your private label business doing? 
Overall, private and exclusive label is 22 percent of our business. Recently, we have done some interesting launches in food – honey, jam, ghee and HyperCity noodles. It’s doing pretty well against Maggi. So we are continuing to develop our private label business in a cautious way. There is a trust factor with the HyperCity brand and everything that we have put out in the food domain has done well. So we will continue to push it Further.
What kind of customer insights have you gained in the last couple of years?
We did some big research in March last year when we put groups of customers in a room with a facilitator. We told them that management will listen to their conversation. What they said was very interesting. “We love your stores, the range and hygiene. The service is ok. But you are a little bit expensive.” Since then we have been deliberately working on the costs factor. We don’t want to be seen as exclusive. We did a lot of work on that. We have benchmarked 70 skus which are in the customer’s basket to make sure that we are the cheapest or the second cheapest in the market. We are doing research to see whether the customer has noticed this. For us it is important not just to retain our customer base, but also to widen it.
When we started to benchmark our prices and got serious about it, we realised that there are other retailers who have been able to build a reputation on being the cheapest but in reality they are not. So we are trying to catch up and correct that assumption. We ran four-page advertisements in newspapers where we had a preloaded shopping trolley with 25 percent off. We also took another 10 percent on FMCG food and groceries. The first one was highly successful. Last year was all about getting match fit, but this year it is about pushing volumes through business and increasing profitability. It’s about being a little bit more aggressive and spending more money in getting our message out to our customers.
What is the investment in a Hypercity store and how long does it take to break even? 
Let’s assume that you have put the store in the right place with the right rent. In a tier I city such as Bangalore both our first and second stores broke even at the store level in nine months. Stores in tier II cities take 18-22 months. These were the large-box formats. I am anticipating that the 30,000 and 50,000 sqft boxes should break even faster than nine months, hopefully within six months. The investment is around Rs1,200-1,400 per sqft, so a 50,000 sqft store should take around Rs 7.5 crore.
What kind of expansion are you looking at? 
We currently have 13 stores of various sizes and have been quietly signing properties over the last 2 years. We are looking at opening around 22-24 stores in the next 3 years. In addition, we have signed some greenfield sites. We will continue to sign and fl oat clusters in Hyderabad, Bangalore and Mumbai. We will be entering Noida with our first store by the first quarter of next year, and a second outlet will aslo open there around the same Time.
We are very happy with the performance of our outlets in Bangalore. But the city that actually surprised me was Bhopal. When we opened in October 2010, we were the first supermarket in the city. We have always had fantastic footfalls there and we have seen the business grow through the second and third year. That was surprising for a tier II market. For the first 15 months, we were the only supermarket there. When Reliance came into the picture, about 7 kms away from us, we saw our sales dip for two months, but now we are back to the growth level as before. So the market has absorbed the second player coming in.
Though our focus really is on clustering in tier I cities, we will be opening one store every year in tier II markets. Currently, we are on-site in three locations – a 65,000 sqft store at Vivacity Thane, Mumbai; a 47,000 sqft store at Hyderabad; and a 25,000 sqft store at in Baroda.
In terms of investments, we are looking at roughly Rs 24-26 crore for four stores this year. There are no other major investments for us. We run out of one warehouse in Mumbai.
What is your location strategy? 
We share our property team with . Though the businesses are run separately, we share the property, taxation and treasury, and our location strategy is also the same.
The reality of location is the fact that a lot of times we don’t know whether the mall is going to be successful or not. Sometimes you are very confident, and other times you are building for the future. Though there is some science to it, there is a lot of gut feel as well.
We have definitely learnt some lessons in terms of the size of the store and visibility. Typically, a hypermarket is in the basement, but we are very clear that the basement needs to have visibility. We are also very clear that it’s better that the hypermarket is not the only retailer. Having an electronics store, value retailer or a lifestyle store makes the mall that much more successful.
What are your future plans? 
The next 12 months will be about how hard we can push sales and how much more volume can we punch. We have invested very heavily in IT and operations. So we have a better front-end presentation than other competitors, and as a result we are able to get better volumes. Our stores coped very well during Diwali, which is a busy trading period. And that set us thinking that we could put more volume. This year is also about pushing our apparel business, investing in private label and developing home and lifestyle products; furniture is one of the categories we want to get into seriously.