The Radhakishan Damani-led Avenue Supermarts may have had a two-year lead over Trent Hypermarket (THPL), but it has scaled up much faster than the Tata-Tesco joint venture. While with 42 stores THPL is still in the red, Avenue is handsomely profitable. In 2016-17, Avenue Supermarts reported a profit of Rs 478.79 crore while THPL reported losses of Rs 52.39 crore. THPL has been slow to scale up; revenues in 2016-17 were just Rs 892.57 crore. Moreover, the company reported an EBITDA loss of Rs 16.71 crore compared with a Rs 21.54 crore loss in 2015-16. The company, which runs the Star Daily, Star Market and Star Hyper chains, covers a space of 0.25 million square feet.
In contrast, Avenue Supermarts has 131 stores across 4.1 million square feet and reported revenues of Rs 11,912 crore in 2016-17. In the same year, the retailer’s gross profit margin was up 46.9% year-on-year to Rs 995 crore.
Although it has been around for nearly 14 years, THPL is yet to gain momentum. Last year, it added 17 stores across 0.10 million square feet. Star Bazaar has stores in malls where operational costs are much higher and the locations are more upmarket compared with Avenue’s D-Mart.
As a result, THPL has been forking out much higher rentals. Analysts estimate rentals could account for as much as 15% to 20% of costs.
In contrast, “Avenue’s strategy has envisaged opening neighbourhood stores catering to the low-to-mid market segment where the catchment is higher,” said Pankaj Renjhen, managing director, retail, JLL India. Avenue Supermarts pays less than 1% of sales as rent. The company mostly owns the stores or has expanded through long-term leases.
THPL has revamped and right-sized stores; some stores are half the original size. From an average size of 40,000–80,000 sq ft, stores now occupy between to 15,000 and 30,000 sq ft. Several loss-making stores have been shut. Also, in the last couple of years, stores are being opened in standalone locations rather than in malls.
Analysts say THPL has been making losses for want of scale. The company is targeting to break even its Star brand in FY19 by opening smaller stores with high throughput (Rs 20,000 psf). A spurt in store addition (17 in FY17 against just 24 over FY05-16) suggests increasing comfort over store-level economics.
THPL has been investing in the business. The two joint venture partners —Tata and Tesco — have invested Rs 1,000 crore in the past three years but close to Rs 280 crore has been used to fund losses, and some Rs 160 crore to pare debt.
However, like-to-like sales growth at Star Bazaar stores has been muted — in 2016-17, it was just 2.1%, down from 8.6% in 2015-16. “The like-to-like sales growth was impacted partially due to demonetisation and also the 17 new stores added in the last one year was not comparable, as it takes minimum two to three years for like-to-like growth to be considered,” an analyst at ICICI Securities said.
Industry experts further said that while other retailers are taking different initiatives to drive sales and footfalls, Star Bazaar stores are lagging in terms of improving merchandise and in-store level activity to attract customers, among others. Avenue, on the other hand, reported a strong like-to-like growth of 21.2% in 2016-17, similar to previous year’s levels.