By Ranju Sarkar

Business Standard, New Delhi January 03, 2010

Large retailers are trying to make their small food and grocery stores viable by trying out new ideas. While some like Reliance Retail are converting most of these stores into a deep- discount value format, RPG Group’s Spencer’s is looking at the franchising route.

Anand Raghuraman, partner, The Boston Consulting Group, said it is extremely tough to make money on small food and grocery stores. “It’s a crisis situation, and retailers are trying to find answers to some fundamental questions.’’ The problem is that retailers are straddled with a large base of small food & grocery stores — nearly 700 of them.

Reliance’s retail business reported an aggregate loss of Rs 557 crore on revenue of about Rs 4,000 crore for the year ended March 2009. Half of these losses came from the food and grocery chain, Reliance Fresh, which reported a net loss of Rs 249.30 crore on revenue of Rs 1,778.06 crore; the rest came from other formats.

Retailers have been trying to figure out how they can make the small stores viable. Industry sources said that Reliance Retail is now looking at a heavy-discount format; the stores will offer very little service, no air-conditioning but prices will be much lower than kirana stores. A Reliance spokesman did not respond to an emailed query.

Similarly, Spencer’s is looking at franchising these smaller stores. Devangshu Dutta, the chief executive of Third Eyesight, a retail consultancy, said this can work if the franchisee is involved in the operations. ‘‘In food, the margins are very low. If it’s a good site, you can offset lower margins with higher throughput,’’ he said.

Franchising has worked well in footwear and apparel retail where margins are higher at around 25 per cent. In food and grocery, the average gross margins are around 15 per cent. If food stores can achieve double the sales of apparel stores, they could be viable for franchisees. A brand like Spencer’s would be able to drive-in footfalls.

A franchisee could be someone who has a space to rent out, an existing retailer, or a commodity trader entering the retail business. It can also be an existing kirana store owner who will gain from the marketing and the sourcing support of a retail chain. ‘‘There are franchisees who have 15 to 30 outlets and handle four to five brands. But for it to work in food, the franchisees need to be active and involved in operations,’’ said Dutta.

If they are not, wastage, error and theft (which is very high in India) can eat into the net margins, and make the stores unviable.