It?s not really much of a surprise that More chain of stores, run by the Aditya Birla group, is being pruned. After the fate of TruMart, Subhiksha, Expresscitys and many of the KB Fair stores, it?s now evident that retailers will take a while to figure out the supermarket or small store model. And it?s now more than evident that the kiranas aren?t about to wither away. The Aditya Birla group management says that 40-50 of its smaller stores are being closed because they?re not profitable. That?s easy to believe. For one, the throughput per square foot remains low; while internationally the throughput is around $400 per square foot per year or about R18,000, in India retailers are finding it hard to clock even R10,000 per square foot per year. Ideally, they need to do better, making at least R12,000 to R14,000, but it?s not easy.
In a city like Mumbai where round-the-clock home delivery and credit are the norm, it?s virtually impossible to compete with the kiranas, especially now that many of them have been spruced up and stock a fairly large variety of products. Moreover, while revenues in western countries tend to be higher because of the relatively high share of pre-cooked and ready-to serve foods, this is not the case back home. Also, the amount of shelf space devoted to non-vegetarian food abroad can be as much as twice that allocated for vegetarian food, which is cheaper; in India, it would be the reverse, resulting in lower revenues.
The lower revenue per square foot in India leads to lower gross margins. Again, internationally, retailers are able to extract better margins from suppliers whereas in India they have less bargaining power, given the large number of outlets; the Hindustan Unilevers of the world have built up formidable distribution networks and are able to squeeze retailers. So supermarkets are finding it hard to break-even. Thus, while a chain may have hundreds of stores, aiming for economies of scale, it may not work unless there?s a catchment that provides revenues. Also, corporate costs are extremely high in the food and grocery business simply because of the large number of categories which could go up to as many as 40?a manager who buys meat can?t also be procuring vegetables.
On the other hand, for a category like apparel, the segments could be just three?men, women and children. So the investments in technology and people required for food and grocery outlets remain high whereas productivity remains low because of the lack of skills and experience. Which is why the Aditya Birla group wants to focus on hypermarkets?larger stores that cover anywhere between 40,000 and 1,00,000 square feet; the difference in the gross margins for supermarkets and hypermarkets is around 400-500 basis points, with the latter clocking gross margins of 20-22%.
Compared to a supermarket, the costs for a hypermarket get defrayed across a much bigger space and turnover: whether the space is 2,000 square feet or 30,000 square feet, there?s one store manager.
This is particularly true for rentals, exorbitant in big cities, calling for matching revenues. In some areas like Thane in Mumbai, for instance, it?s hard for supermarkets to pull in customers when there are a dozen hypermarkets. Supermarkets can attract client?le if they have a strong differentiator, one of these could be private labels, if they?re priced attractively and are of good quality. If a retailer gets it right, it could sell big volumes and since the costs are lower, compared to those for big established brands, the margins would be its for the taking. However, private labels can be tricky: the challenge is to keep stocks moving. If stocks remain unsold, they have to be dumped and that can be costly because retailers are compelled to hold relatively larger inventories of private labels.
In contrast, larger brands can be procured in smaller quantities, sometimes even on a daily basis. If stocks of too many categories remain unsold, the margins will vanish altogether. Some supermarkets are devoting more space to certain categories, like vegetables, where freshness is an important attribute. That could work well in a hot country like India where vendors in wet markets are hard pressed to keep vegetables from rotting. Also, the Indian housewife, unlike her counterpart in the West, needs a wide variety when it comes to groceries, condiments and ingredients. Housewives may be lured by variety and willing to give up the customer experience but for that a supermarket would have to run a higher SKU (stock keeping unit) density. In other words, it would need to stock a larger number of SKUs. So if a store currently keeps 2,000 SKUs across 2,000 square feet, it may want to up the ratio to 1.6:1 times. That kind of a ratio could be a sweet spot, although this may take away from the customer experience. Experts point out that the model has worked well in Japan, where customers have been willing to give up some amount of experience in exchange for variety. However, the challenge in India is that consumers don?t really pick up very large quantities at one time, which again limits revenues.
Indeed, even hypermarkets find they?re not really making the kind of revenues in the food and grocery segment. With the price of fuel soaring it looks like the friendly neighbourhood grocer?s the one who is going to keep doing brisk business.
shobhana.subramanian@expressindia.com
