It is unlikely more will be able to narrow its losses this year especially if its expanding, Harminder Sahni, managing director at retail consultancy Wazir Advisors said, adding that losses narrowed last year because some unprofitable stores were closed down.
ABRL plans to set up 60 supermarkets and 10 hypermarkets a year but experts point out that the smaller format isnt doing as well. They have been able to manage the supply chain and inventories better in the big-box format, which is in any case a more profitable business since apparel and lifestyle products fetch better margins, a consultant explained.
Observed Pinaki Rajan Mishra, partner, EY, Running convenience stores is a tough business and the challenges are many. To begin with, unless there is scale, its not a cost-effective operation. More important, predicting demand can be difficult and since the number of SKUs (stock keeping units) that these stores have is smaller, sometimes they lose out. Mishra pointed out that managing the supply chain is also that much harder because there are many more stores to which goods need to be delivered.
The strategy at ABRL seems to be to continue to expand but stay within a few geographies. Vishak Kumar, CEO, Aditya Birla hypermarkets and supermarkets, had remarked in an interview to FE a few months ago that the important thing was to ensure that the operations were not scattered. To get maximum benefits, stores must be located in one geography, rather than in many. So we are penetrating deeper in markets where we
already operate, Kumar had explained.
ABRL did not respond to an email seeking comments on its strategy or expansion plans for this story.
The chain exited the Mumbai market in 2012 citing high rentals. Kumar had said in the earlier interview that given the small margins, it did not make sense to open stores where the costs were disproportionately high. Real estate is expensive in Mumbai and unless we find a solution to this, Mumbai will not be on our priority, he had said.
ABRL ventured into food and grocery retailing in 2007 after coughing up Rs 690 crore for the 167 store-strong south-focused supermarket chain Trinethra Super Retail. The company had charted out an ambitious target of 2,200 supermarkets by 2014. But lower-than-anticipated sales and high rentals forced the company to shut unviable stores over the years. The chain closed about 100 loss-making stores in 2009 and 2010, and about 40 in 2012.
While ABRLs debt rose 16% to Rs 3,994 crore as on March 31, 2013, the business continues to be funded close to Rs 1,800 crore has been pumped into its supermarket and hypermarket business in the last two years. In FY13 and the first quarter of FY14, the company saw an equity infusion of Rs 1,224 crore into the retail business, according to a report by ratings agency ICRA. Additionally, the company has borrowed Rs 215 crore for working capital and expansion in August, as per a filing with the registrar of companies (RoC), and borrowed Rs 300 crore loan in FY12.
The company is taking various steps including improvement of operational efficiency, vigorous pursuit of various cost reduction initiatives undertaken, monitoring and controlling of inventory, launching of various range of private label brands across various categories, the company said in a letter in January, 2014 with the RoC. The net worth of the company was a negative Rs 2702.4 crore as on March 31, 2013, as per the filing.