Change is the buzz word at K Raheja Group’s HyperCity, one of the leading retail chains in the country. From the sprawling 1 lakh plus sq.ft. outlets to the recently launched 30,000 sq.ft. store in Bangalore, HyperCity is now pushing profitability by launching smaller-format stores across neighbourhoods. This new move by the company will be replicated even in other markets in future. With a focus on tier I cities, the plan is to take the store count to 22 in the next 3 years. In an exclusive interview with Nivedita Jayaram Pawar, Mark Ashman, CEO, HyperCity Retail (India) reveals that this year is all about pushing sales and the apparel business, investing in private labels and developing home and furniture segments.
You have recently launched a 30,000 s.q. ft. store in baglore. Tell us something about this new move.
Originally we were opening around 1 lakh sq.ft. properties. Two years ago, we shifted to launching 70,000 sq.ft. outlets. We did some more refining of the model and signed 50,000 sq.ft. boxes. But this is our first 30,000 sq.ft. store. So there are a couple of differences. The main difference is that there are two categories which are not represented in this 30,000 sq.ft. box – furniture and electronics. The layout is by end use. In the new format, apparel segment spreads across about 4,000 sq.ft. We have changed the look of our fresh produce section to the international tray system. We now work on a narrower gauge fixture that allows us more space. So the choice of food (which is the biggest part of our business) in the 30,000 sq.ft. format is virtually the same as in our very 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 those developers who want to see the kind of footfalls a hypermarket brings in, which is really important to their mall, will be pleased that they can get the whole HyperCity experience in a 30,000 sq.ft. store. Hence, it will be a win-win for both the developer and for us.
So what were some of the biggest challenges in this format?
The biggest challenge was to convince the internal team involved in opening 1,00,000 sq.ft. centres that this could be HyperCity and could have the entire DNA that makes HyperCity great in a smaller box. Having worked on this format for the last 15 months and waiting for the developer to finish 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 the existing stores?
We still want to have the big boxes where we have a bigger offer including furniture. In Bangalore where we already have 3 stores, we believe there is space for 10 big boxes (50,000 sq.ft.) and another 8-10 small boxes in the next 5-8 years. Therefore, we see them as complimentary. 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 sq.ft. store is of a much higher percentage than it would have previously been.
Some of our backroom activities and stock 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 sq.ft. 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 sq.ft. store at Amritsar to 60,000 sq.ft. The store 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 as compared to Rs 11 lakh for 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 to company profitability. Now we are pushing for company level profitability.
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.
What is the strategy to profitability at Hypercity?
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. We have seen very high double-digit growth on apparel business. Our apparel business a year ago was about 7.5 percent of our sales and our target by 2015 is to double that to 15 percent of sales. At the end of Q3, we were at about 9.5 percent of sales. So we are very much on track.
Tell us something about your private label business. How is it growing?
Private label business is good. 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 we are the cheapest or the second cheapest in the market. We are doing the research to see whether the customer has noticed that. 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 is all really about pushing volumes through business and it’s this bottom line that will improve profitability. It’s about being a little bit more aggressive and spending more money in getting our message out to customers.
Typically 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. So a store at the right location at the right rent will definitely break even within nine months. I am anticipating that the 30,000 and 50,000 sq.ft. boxes should break even quicker than nine months, hopefully within six months. The investment is around RS. 1,200-1,400 per sq.ft. So a 50,000 sq.ft. box 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 green field sites. We will continue to sign and float clusters in Hyderabad, Bangalore and Mumbai. We will be entering Noida with our first store by the first quarter of next year.
The second outlet there will open 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 before Reliance came into the picture, about 7 kms away from us. We saw our sales dip for two months and now we are back to the growth level that we had 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 sq.ft. store at Vivacity Thane, Mumbai; a 47,000 sq.ft. store at Hyderabad; and a 25,000 sq.ft. at Inorbit Mall, 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 Shoppers Stop
. Though the businesses are run separately, we share the property, taxation and treasury. While the businesses for HyperCity and Shoppers Stop
are different, the location strategy is the same for both.
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. You got to built the mall and let the customers come in. So you can see the catchment either on a spreadsheet or you can see it being built or maybe you can just see the plans of what the developer is going to build. Sometimes you walk away with a lot of confidence and other times you are building for the future. Though there is some science to it, it’s a lot of gut feel.
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 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 it much more successful.
What are your future plans?
These 12 months are all about how hard can we push sales and how much more volume can we punch. We have invested very heavily in IT and operations. So we get a better front-end presentation than other competitors and as a result we are able to get better volumes. Our stores coped with Diwali, which is a busy trading period, very well. 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 furniture. Furniture is one of the categories that we want to get after.