It’s too early for Spencer’s turnaround

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Updated: March 23, 2015 11:40:33 AM

A break-even will take time since the high-margins apparel category’s share in the retailer’s revenues is still small

Shashwat Goenka, spencers, spencers retail, Spencer’s Retail, Sanjiv GoenkaWhen Shashwat Goenka took up the challenge to turn around Spencer’s Retail, which has been reeling under losses for years, the 23-year-old son of Sanjiv Goenka, must not have realised how difficult a task that would be.

When Shashwat Goenka took up the challenge to turn around Spencer’s Retail, which has been reeling under losses for years, the 23-year-old son of Sanjiv Goenka, chairman of RP-Sanjiv Goenka Group, must not have realised how difficult a task that would be. The retail chain remains in the red and reported losses of R164.5 crore in FY 2013-14. Analysts believe losses will come down in FY15 to levels of R120 crore; a recent report by Deutsche securities pegged it at R121 crore adding Spencer’s will not turn profitable in the next three years. Nomura expects the retailer to grow at close to 20% every year for the next three years, and estimates a loss of close to R45 crore in FY17.

Although, it has been around for 15 years, Spencer’s has not managed to get the business model right and has closed down about 200 stores. Almost all of these were not profitable and the bigger problem was that there were a larger number of smaller stores that generated less revenue and smaller margins. “We went through a consolidation and we have exited stores which were non-performing. We didn’t want to be in the western part of the country,” said Goenka, sector head, Spencer’s Retail.

The retailer is now focusing on large format hypermarkets and while 79 smaller stores will stay open, all its expansion will be in hypermarkets—34 at the last count. In 2013-14 nine new hypermarkets were opened, and another five are expected by the end of this year.

Spencer

Spencer’s pace has been somewhat slower than that of its peers, namely, Future Group’s Big Bazaar, Food Bazaar, FBB and eZone, which added 20 new stores last year. Future Group too is looking to focus on hypermarkets and the home retail segment.

Spencer’s new hypermarkets will be set up across two categories —regular and compact; the first will be built across 60,000-70,000 sq-feet while the compact outlets will occupy 25,000- 30,000 sq-feet.

Goenka believes there’s a problem with the product mix in the Spencer’s stores. The apparel category was hardly contributing three per cent to the company’s revenues. It was, therefore, important to get a higher share of revenue from apparels, which  fetches gross margins of 35-45%, twice that of the foods business. “In the food and daily retail business, which comprises the bulk of Spencer’s sales, the industry reports gross margins of 19-20%. Despite tweaking its model, Spencer’s has not been able to turn around,” said Arvind Singhal, chairman of retail advisory firm, Technopak. Spencer’s margins in the foods business are about 18%.

Shashwat Goenka, spencers, spencers retail, Spencer’s Retail, Sanjiv Goenka

While Goenka had hoped the company would break even last year, it didn’t. “Every time we thought we were close to it (breaking even) something went wrong,” he said. A break-even could be some time away since apparel’s contribution to revenues will hit 15-20% only in the next few years. But the business has been overhauled. The entire supplier base was changed to cater to the tastes of customers from the upper segment of society. A new team was put in place with a new head to run the business and the new design team now works closely with the vendors.

In the foods business, too, a bunch of new premium products has been introduced which are expected to fetch higher margins.  “We were always a food-first hypermarket and we had to focus on the non-food part to deliver on the bottom line and profitability. You need to focus on categories which give you higher margins,” said Goenka.

Same store sales for Spencer’s improved by 7.7% to R1,383 in FY14; in FY15 so far, the numbers have crossed R1,400. “Our cash flow forecast for Spencer’s Retail indicates that CESC would need to infuse an additional funding of R 440 crore during FY15 and FY17 into the business,” Nomura observed. Goenka’s immediate task will be to convince shareholders of CESC where the money will be spent.

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