After lull, Spencers in hyper-expansion mode

Written by Rachit Vats | Mumbai | Updated: Sep 16 2013, 07:53am hrs
At a time when other FMCG retailers like Big Bazaar and More are consolidating, RP-Sanjiv Goenka-led Spencers Retail, a subsidiary of the R7,570-crore CESC, is looking to scale up.

After a lull in expansion in 2012 when it entered a consolidation phase and a decision to put a full stop to supermarket expansion from the current 97 stores, Spencers is planning to massively scale up its hypermarket presence from 28 stores to 100 by 2017. Plans are also afoot to increase the hypermarket store size from 23,000 sq ft to 29,000 sq ft.

The hypermarket format is working for us and we are looking at a major scale-up. There are 70 stores lined up over the next 48 months. Well cross the 100 mark by early 2017, Spencers Retail president and CEO Mohit Kampani told FE.

The retailer says it has lined up an investment of R600 crore from its parent group for the large-format expansion. At the end of the FY13, CESCs cash and equivalent stood at R1,425 crore.

We are looking at expanding the average real estate space from 23,000 sq ft to 29,000 sq ft for the upcoming stores as our fresh business requires more space. The fundamentals of the large-format business are very strong for us and we will open in smaller clusters of UP, AP, Delhi-NCR and eastern India, he said.

The company estimates the cost of setting up each large-format store to be in the range of R6 crore to R10 crore.

Spencers inspiration seems to be Reliance Retail, which is also betting big on the hypermarket format and aims to open at least 100 such stores by 2017 from the current 17. This sudden interest in home-grown retail companies comes at a time when the likes of Bharti-Walmart and Metro are putting brakes on their expansion in large-format cash-and-carry model.

Meanwhile, Spencers is also looking to slow down its supermarket expansion. The company shut down at least 30 of its small stores in 2012.

We will focus on the hypermarket format and wont look at entering any new format soon. There will be no further expansion in the supermarket space. The 97 stores are profitable and we will continue to run them without making any additions, said Kampani, who took over as the CEO in December last year. The average space for the small supermarket store is 2,400 sq ft.

For its hypermarket expansion, the company is eyeing Andhra Pradesh, Uttar Pradesh, National Capital Region, West Bengal, Chhattisgarh, Jharkhand, Tamil Nadu and Karnataka. The company expects to increase its retail footprint by 215% by 2017. It is, however, holding back by three years its expansion in western India. Right now, the retailer has a few stores in Mumbai and Baroda, which it will continue operating.

For retailers, in most cases, large-format stores are anchor stores and they are able to negotiate lower rents, often getting free rents for the first few months. The top line is higher and owing to larger volumes, retailers are able to manage supply chains better. Spencers has realised that it will be more successful in the large-format business. The business is turning around as it has reduced its losses and its quite possible that it will pick up a partner soon, said KPMG Transaction Services partner Mohit Bahl.

The group has a strong cash flow and we have already made a major investment in opening the existing line-up of stores. Currently, we are being funded by the group. We are looking at turning Ebitda positive next quarter, said Kampani.

At the end of FY12, Spencers revenues, included in the top line of CESC, were R1,386 crore while losses were to the tune of R209 crore. The retailers total debt stood at R436 crore, with interest on debt at 43.5% during the said period.

CESC is the listed entity of the R14,000-crore RP-Sanjiv Goenka Group panning across five business verticals, including power and infrastructure. The company says it is open to listing the retail business or accommodate a strategic partner after the breakeven.