Kamath, Business Standard
June 22, 2014
Birla Retail, which started operations in 2007 with the brand
more, was looking to break even in FY 2013. The wish
remains unfulfilled -- still.
Spencer's Retail, part of the Sanjiv Goenka group which started
in 1990s and opened stores in the modern format in 2006, was originally
looking at a breakeven in financial year 2010-11. After missing
two fresh goal posts, the retailer now says it hopes to break
even in the next couple of quarters.
Birla and Spencers are just two of the many supermarket
chains, promoted by big corporates during 2006-08, are still making
losses. While Star Bazaar opened its first store in 2004, it began
expanding only post 2006. Sunil Mittals Bharti Retail, Raheja-owned
Hypercity, Tata-owned Star Bazaar are also yet to turn profitable.
Consultants said ideally, retail ventures should break even in
five to six years, but the tough economic environment and some
not-so-prudent decisions have put paid to any such efforts.
According to a recent report by Crisil, the top 10 food and grocery
retailers such as Aditya Birlas more, Bharti Retail, Raheja
owned Hypercity, the food and grocery business of Reliance Retail,
accumulated losses worth Rs 13,000 crore in FY 2014. Crisil estimated
that these retailers have invested about Rs 19,000 crore.
According to the report, Avenue Supermarts, which runs D Mart
stores and Future Value Retail which runs Big Bazaar and Food
Bazaar, are the major retailers which are profitable. Crisil said
Future had the first mover advantage and Avenue had a low cost
model which helped them to break even.
So what is holding back these chains from being profitable?
Besides the competition from kirana stores and the inherent low
margins in food and grocery retail, costs associated with people,
property and supply chain seem to the major issues that posed
challenges to the chains floated by corporates.
While the retailers did not respond to mails, consultants say
they were doing many things to achieve faster profitability. Hypercity
is reducing the sizes of stores from 1, 00,000 sq ft to 40,000-50,000
sq ft and increasing share of fashion which carries high margins.
Star Bazaar is also halving store sizes of large format stores
and coming out with mid-sized and small sized stores to achieve
faster profits. Spencers is looking to open 80 stores and
focusing on improving its supply chain.
Crisil says the losses of the top grocery retailers will mount
by about 30% over the medium term and may peak in 2017. After
that, half of the players will start break even. Apart from Spencers
which is looking to break even this financial year, even Hypercity
is looking at Ebitda level profits this year. Since the developers
have deep pockets and they see potential in the retailing business,
they will continue to invest in retail, it said.
Some say one of the major reasons for the failure to have a consistent
strategy over the years is the many changes at the top. Sanjay
Badhe, former head of marketing at Aditya Birla Retail, says Birla
Retail has seen too many changes in management and operations.
They need clarity in management, he adds.
While Birla made Sumant Sinha, the groups M&A specialist
as CEO when it launched the business, Sinha quit within one and
a half years. Thomas Varghese was then made CEO but in 2012 he
was shifted to the textiles business and replaced by Pranab Barua,
who came from Aditya Birla Nuvo. Late last year, the retailer
named Vishak Kumar, CEO of its both formats.
Reliance Retail has also changed its top leadership frequently.
While it debuted with Raghu Pillai as CEO of value formats. He
was replaced by Gwyn Sundhagul who came from Tesco, Thailand in
2010. In a major rejig next year, Reliance Retail named Rob Cissell,
former chief operating officer of Walmart China, as CEO.
But retail consultancy Technopak Advisors chairman Arvind Singhal
said Reliance was firm on getting the right people on board. Some
people worked and some did not. But now they have good team in
place, Singhal said, adding some retailers stuck to people
who did not deliver or stuck for too long.
Dipankar Halder, CEO at PingStripe and former head of supermarkets
at Bharti Retail believes that some retailers are making losses
due to their top heavy organizations with costs that are disproportionate
to their store level costs. Successful retailers abroad
pay very good salaries to store managers because they are the
people who drive the sales. But here we get cheapest guy at stores
and have number of presidents and vice presidents at top,
Indian retailers had to deal with expensive properties while
running their stores. Indian grocery retailers pay rents which
are almost double of what retailers pay abroad. But the chains
earn 2-3% net margins in food and grocery. Ideally, hypermarket
chains should pay 2.5 to 3% as% of rents to revenues to make them
viable and supermarket chains should pay five to six% as% of revenues.
Once you build a high cost base that is created for
rapid expansion, it is easy not to reduce it. The quickest option
available then is to scale down operations, said Devangshu
Dutta, chief executive of Third Eyesight, a retail consultant.
Though retailers such as Aditya Birla, Reliance, Spencers
expanded aggressively between 2006 and 2010 to build scale, most
of them exited unviable stores.
Aditya Birla shut over 150 super market stores in the last five
years while Spencers exited cities such as Pune to focus
on profitability. Even Reliance closed 50 shops, and exited three
formats Reliance Kitchen, which sold modular kitchen furniture,
Reliance Wellness, a beauty and lifestyle chain and Delight, its
There are supply chain issues as well. According to Badhe, retailers
such as Star Bazaar and Aditya Birlas More are still sorting
out their supply chain issues and could see improvements soon
while Reliance has got its processes right. Pingstripes
Halder says many retailers make the mistake of not treating unbranded
items such as fresh produce, and meat as a separate category.
You buy products such as meat, fish and fresh produce from
middlemen, obviously the store level profits will come down. The
more you do it, you have to share the profits, said Halder.
Kumar Rajagopalan, chief executive of retailers body Retailers
Association of India, says that inability of retailers to build
scale at state levels and local taxes are posing challenges to
retailers to be profitable. It is scale per state, or in
many cases per city, and not scale per nation thanks to the cascading
effect of taxation like local sales tax, local entry tax, etc.
It takes time to build that kind of scale. Rajagopalan states.
Though retailers such as Reliance Retail tried a farm to
fork strategy, it did not take off the way it wanted due
to opposition in many states. Most of them open their distribution
centres according to taxation and not according to transportation,
says Kumar, adding once GST comes in, they can set up large
DCs at one place instead of multiple DCs."
(Published in Business