May 17, 2010
The outskirts of Bangalore, home to many large hypermarkets,
see a lot of frontier action in retail. Recently, the Raheja Groups
hypermarket, HyperCity, opened a store in Mahadevapura, where
the likes of Future Groups Big Bazaar and the Jubilant Organosys-owned
Total already enjoy a loyal clientele. But nobody was more anxious
about fresh competition than the manager of More, which also has
a store here.
As it turned out, Our sales were not affected in the weekend
in which the new store opened in our catchment, says Kapil
Agarwal, Mores vice-president, operations hypermarket (south),
with relief. The Mahadevapura store hopes to grow by 30
per cent this year.
The $25-billion (Rs 1.15-lakh crore) Aditya Birla Groups
retail chain is on a quest to garner greater market share in the
$350-billion (Rs 16.1- lakh crore) Indian retail market. Mores
CEO Thomas Varghese says he has a strategy in place to get the
company back on track. This newfound confidence comes after a
three-year struggle with runaway overheads that saw More shutting
down some 100 stores, in spite of which its balance sheet continues
to bleed. Now, More has only 631 stores, including seven hypermarkets.
To make up for the closure, More has had to scale up quickly to
3 million sq. ft of more affordable retail space.
Even as it focuses on hypermarkets and consolidates its position
in the south, More is betting big on private label products that
add up to 320 items or stock keeping units (SKUs). Varghese believes
the company can grow only by driving private labels, something
that Future Groups Kishore Biyani has tried successfully
at Big Bazaar.
Currently, market leader Pantaloon (Future Group) holds 10 per
cent of the $20-billion (Rs 92,000 crore) Indian organised retail
space. More expects its turnover to touch Rs 1,500 crore in 2009-10,
up 30 per cent from the past year. It also hopes to break-even
operationally by 2012, and is aiming to match Pantaloons
share by 2015. It is a tall claim and tough to achieve: competition
is growing and survival depends on large groups ability
to sustain bleeding retail businesses.
Mores private label gamble is one of the reasons why it
has to be watched closely. We are one of the largest private
label players in the industry, says Varghese. Close
to 17 per cent of our sales comes from our private label products.
The share is growing by 50 per cent in the food category, and
by 20 per cent in the fast-moving consumer goods (FMCG) category.
In food items such as noodles and sauces, Mores private
label sales touch 30 per cent of the sales. This is not unexpected.
Globally, Tesco and Wal-Mart earn 55-60 per cent of their revenues
from private labels, of which nearly 60 per cent comes from food,
and only 45 per cent from FMCG. Like many large retailers, More
too has its own brands such as Feasters (food category), Jaan
(tea), Kitchens Promise (pickle) and Enriche (personal care),
across 40 categories.
But industry analysts have reservations about Mores pre-emptive
private label strategy. In terms of branding, apart from
quality and the category acceptance, private labels usually succeed
when the retailer has managed to build brand equity at the store
level, says Sanjay Badhe, a retail consultant who has worked
with the Aditya Birla Group. More, on the other hand, is
betting big (on its private label) even before establishing itself.
In sheer numbers, More is close to Pantaloon, which has more
than 50 private label categories that offer more than 350 SKUs.
The Pantaloon brands are now powerful retail brands that
strengthen our lead in modern trade, says Santosh Desai,
CEO of Future Brands in Mumbai. He adds that powerful product
brands also act as strong store differentiators in the long term.
Private label precedents have been established already in India.
Pantaloon has the highest private label sales close to
85 per cent in apparel and 35 per cent in food. Shoppers Stop
credits 20 per cent of its turnover to private label. More hopes
to achieve 30 per cent by 2012.
We realised the potential of private labels with our project
in Visakhapatnam, says Farida K., assistant vice-president
and private label head at More. The company realised that when
more private labels were stacked along with FMCG brands, customers
did not mind experimenting with Mores in-house brands. Now,
Mores private labels account for 30 per cent of all sales
in its 17 stores in Visakhapatnam.
More now works with 45 vendors through the 17 distribution centres
it has created with warehouse space of 450,000 sq. ft to make
timely deliveries. It also sources 25 per cent of its fresh food
products directly from farmers, the rest from local mandis, and
has eight farmer-linked collection centres across India for vegetables.
While Pantaloon has more than a thousand suppliers, according
to Biyani, More wants private label to be its main business as
it involves low supply costs, offers margins of up to 70 per cent,
and forces FMCG firms to offer better terms of trade.
Now, our strategy is not about expansion, says Varghese.
We will add a few stores and keep shutting down unviable
ones. He wants to keep capex costs as low as Rs 1,500 per
sq. ft over the next two years the average capex for a
retailer is about Rs 1,750 per sq. ft.
Analysts say More was successful in the south 60 per cent
of its stores are there, and 55 per cent of its revenues come
from the region after its acquisition of Trinethra Retails
160 stores, with an established supply chain and process in place.
The deal cost More Rs 170 crore in early 2006. It was from Trinethra,
a value retailer, that the Aditya Birla Group created the blueprint
Paying For The Past
While More seems to be pulling itself out of trouble, it still
has a long way to go. In mid-2006, Kumar Mangalam Birla, chairman
of the Aditya Birla Group, gave Sumant Sinha, a former investment
banker from the US, the charge of the groups plans to compete
with the likes of Reliance Retail. At that time, Reliance Retail
had just announced its
Rs 25,000-crore plan to conquer Indias consumer market.
But when Sinhas team suggested a strategy of rolling out
only 10 branded stores in a region and offered a conservative
plan on expansion, the board rubbished the strategy. The
board did not want to lag behind Reliance or Pantaloon, and it
wanted to roll out 500 stores in six months, says a source
in the company. So, the management team just signed properties
at higher rates, without processes to support the stores.
So by 2008, 730 More supermarkets were making high losses to
high rentals, exorbitant staff costs and a disorganised supply
chain. It nearly ended the conglomerates retail dream.
To make matters worse, the entire senior management of the retail
chain was either asked to leave or shifted to other departments.
In fact, some say the problem with the retail chain was more internal
than at the store level.
Mores management and Trinethras CEO Pranab Barua
had differences over the methods of running the business. Barua
is now the member of the board and advisor to the retail chain.
We understand retail is a low-margin business, says
Varghese. But when I took over the company, the overheads
were extremely high.
Varghese says he had little understanding of retail when he took
over as the chief executive in 2008, but he had to act fast. He
froze hiring, and shut down properties that had high rentals,
which added up to 10 per cent of the companys turnover.
In 2009, the company was paying a whopping Rs 731 per sq. ft
of retail space as compared to Pantaloons Rs 573. Since
then, More has renegotiated rentals for 90 per cent of its stores
(see Its A Tough Business and Repenting
At Leisure). Standard rentals are now below Rs 500 per sq.
Unless the rent is 4 per cent of the cost of sales, a retail
business will not make money, says Varghese. Usually, builders
ask for 5-8 per cent of sales in a revenue-share model or charge
high rent in case of lower sales, he adds.
However, a revenue-share model is not the perfect answer. Says
Ajay DSouza, head of research at Crisil, in Mumbai: What
matters is whether there is traction in going into organised retail.
Only increased sales will determine if retail companies can sustain
even the revenue-share model.
Hypermarkets And More
As a sign of the times, all organised retail chains are bullish.
Says Govind Shrikhande, CEO of Shoppers Stop: Retail is
coming out of the slump, and sales are on the rise. Lower
rentals and revenue-sharing models bring quicker profitability
to retail chains, he says.
Retailers such as More see sense in opening hyper-format stores
because of the large assortment of customers it caters to, the
higher incidence of sales, and the absence of competition from
kirana stores, which hit the supermarket end of modern retail.
In effect, hypermarkets allow corporate retailers higher efficiencies
than neighborhood stores on equivalent square footage basis. This
happens because, for a given amount of management resource and
possibly lower financial outlay, there is significantly greater
sales turnover and higher margin, says Devangshu Dutta,
CEO of Third Eyesight, a retail consultancy in Delhi.
By the end of this year, there will be two more hyper stores
from More in Hyderabad, and there is talk of a property being
signed for a possible hyper store in Chennai, taking its all-India
tally of hyper stores in Mumbai, Ahmedabad and Nagpur to 10. It
is expected that the new stores will cost Rs 10 crore each to
build. We want to create world-class hypermarkets,
says a confident Varghese.
The Aditya Birla board had devoted Rs 8,000 crore to its retail
venture when it started out. Now, three years, Rs 2,300 crore
and several setbacks later, More looks less upbeat. Its struggle
for an identity is far from over.
issue dated 17 May 2010]