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Why hypermarts are a hit in India
Shobhana Subramanian | September 15, 2006
It's just about noon on a Saturday, but the aisles are already crowded at HyperCity, the hypermarket in Mumbai's western suburb of Malad. From sports equipment to freshly baked bread, customers are checking out everything in sight, visibly overwhelmed by the choice.
They probably don't know it yet, but there's lots more in store as players like Reliance Retail, the Bharti group and the Aditya Birla group get ready to set up shop. And if the government relents, even Wal-Mart and Carrefour may be here in a couple of years.
The hypermarket segment has emerged as the format with the highest growth in most emerging markets and is likely to see the most action in India, too.
Today, the country has barely 25 hypermarkets, but the belief is that India's 67-odd retail destinations can easily accommodate over 1,000 hypermarkets by 2010. No wonder the early birds are working overtime to keep the footfalls coming.
The price proposition
People may love to shop, but their eyes never stray too far from the price tag. As Andrew Levermore, CEO, HyperCity Retail, says, "Rich people love low prices, the poor need them."
So, much like in other markets, footfalls in India, too, will be driven by prices. "Unless your prices are the best, especially in the food and groceries (F&G) segment, there's little point," says Levermore, explaining that it's actually the perceived value that customers believe they're getting that is going to matter.
But prices at hypermarkets need to be competitive because they're going to be up against not just the kiranas but also chains of convenience stores being rolled out by groups like Piramyd.
Says Upamanyu Bhattacharya, CEO, Trumart, the convenience store chain, "Our prices will match those of the hypermarkets and kiranas and we also intend to make home deliveries."
That appears to be an unbeatable combination, but retailers are finding ways to fight back. Neeti Chopra, marketing head at Trent, which cut its teeth in what is probably
India's most price-conscious city -- Ahmedabad -- is unfazed. "Prices at Star India Bazaar are on average lower by about 10-15 per cent compared to the kiranas. But more than the price, Chopra believes it's the numerous deals the Tata Group enterprise offers -- for instance, one bar of soap free with two bars -- that customers appreciate more. "In fact, suppliers themselves are willing to give away more if the volumes are high enough," she adds.
The right product mix
Hypermarkets must offer the best possible prices for F&G to bring in shoppers but, unfortunately, margins for this segment can be quite unattractive -- gross margins are estimated to be at best around 10-12 per cent.
To make up for this, they're trying to ensure that they sell an optimal mix of food and general merchandise, the idea being to sell more of the latter, which command better margins. This isn't a trend restricted to India. Even at British hypermarket chain Tesco, for instance, non-food items now account for more than half the revenues.
Says Levermore, "We have an ideal product mix of 60 per cent in general merchandise, which allows us to deliver exceptionally good prices on food and at the same time recover our margins."
Ideally, a 40:60 mix of food to non-food should yield a blended gross margin of around 18-19 per cent.
At Big Bazaar, the ratio is similar, with around 33-36 per cent coming from food and 63 per cent from general merchandise.
Says Rajan Malhotra, head, Big Bazaar, "We are not allocating more than 20 per cent of the space for F&G, although internationally we have seen more space being devoted to this segment. We're also trying to rotate stocks once a week, although currently we're doing stock turns once in two weeks."
Do it yourself
In order to beef up the margins, hypermarkets are also continuously striving to bring down the share of branded products, substituting them with store brands. No category has been left unexplored.
"We are experimenting with store labels for electronics and white goods and they should be out by the end of the year," says Malhotra.
He adds that while the share of store brands is as high as nearly 50 per cent for apparel, for general merchandise, Big Bazaar does not have too many private labels yet.
At Hypercity, the share of store labels is already at 30 per cent. Explains Levermore, "There are certain categories -- such as FMCG -- where the brand loyalty is strong and it's difficult to have too many in-house brands. But in apparel or even home furnishings, it can be as high as 100 per cent."
In fact, Star India Bazaar sells only its own apparel labels, although its overall share of private labels is still low at 10 per cent of its total sales. "We're looking to up that to about 20-25 per cent," says Chopra who believes it's possible to go in-house even with beauty products.
Farm out the purchases
Retailers are also working overtime to keep costs in check by improving sourcing efficiencies.
The idea is to pick up agri-products from as close to the farmer as possible since the seepage across the distribution channel is high: a coconut, which retails in Mumbai for Rs 12 per unit, is marked up nearly 500 per cent.
The cumulative wastage across the supply chain from farm to fridge, estimates PricewaterhouseCoopers, can be as high as 25-40 per cent. Add the tax that needs to be paid to the Agricultural Produce Marketing Committee and the tab is even higher.
Says Levermore, "Today, there are too many middlemen. To be able to capture value, we need to be able to source directly from the farm-gate, bypassing intermediaries, so that both the farmer and we benefit."
Big Bazaar's Malhotra claims he's already going to the farm for some products. "That's why we can sell potatoes at the same price, all the year round," he points out.
To be able to do this, Big Bazaar is attempting to outsource its inventory management: it is exploring an option where the inventory will be owned by another group company but can be drawn on as and when required.
It also has an arrangement with suppliers by which it buys centrally, but has them deliver locally. "The replenishment and payment cycles are driven locally -- we own the inventory only when it is on the shopshelves," explains Malhotra.
Levermore believes that while initially costs may rise, large investments in the back-end -- cold storage units at important locations and refrigerated vans to transport goods -- are a must.
Get more out of suppliers
While initially reluctant to part with more than what they offer kirana stores, FMCG suppliers today are coming around to the view that the modern store format does have its advantages.
"For decades you had a handful of companies supplying to 12 million kiranas who individually had very little bargaining power. But we are seeing a change in attitude as they realise that modern retail encourages growth. The margins from suppliers are getting better," confirms Levermore.
Observes Ravi Naware, head, ITC Foods, "It is true that the interaction between a consumer and a product is far greater in the modern stores. We can make our products more visible by creating special units or blocking off shelves or doing special promotions. That is not possible in kiranas."
Naware admits that retailers are asking for higher margins than kiranas on established categories and concedes that margins on these sales would be lower.
Adds Sangeeta Talwar, executive director, marketing, Tata Tea, "It's true that sales from modern trade outlets yield us lower margins, but at the same time we are beginning to see increased throughput."
Go the extra mile
In India, the poor infrastructure both supports and takes away from the attractiveness of the hypermarket.
As Ranjan Biswas, partner, Ernst & Young says, "A one-stop shop is an ideal proposition for a family, but people are also reluctant to drive long distances in heavy traffic. So there has to be more in it for customers than just price."
Agrees Levermore, who's cashing in on the fact that shopping in India is like a family outing. "Just having a store and air-conditioning isn't enough. We have an environment that supports browsing with spacious aisles and we have entertainment options -- game zones and a couple of restaurants," he says.
To ensure that all its stores are full, Big Bazaar is taking care to see that regional preferences are catered for. Says Malhotra, "At least 20-25 per cent of the range has to cater for local tastes, especially in apparel where the choice of colours varies from region to region. We do a catchment study to design our product range."
Star India has gone to the extent of selling "oiled dal" in Ahmedabad, which is the way the locals like it. And to keep the cash counters ringing, it has introduced store credit cards.
Explains Chopra, "The idea is to give customers credit for a month like the kiranas do. Also, it has empowered the women, many of whom would otherwise have not been eligible for a credit card. Consequently, we're seeing more spending."
And that's exactly what retailers are betting on. They're convinced that the Indian consumer's changing lifestyle and attitude will drive him to spend more.
After all, at an estimated $230 billion, the size of the entire Indian retail sector today is less than Wal-Mart's turnover: $285 billion. Of this, the organised sector accounts for just 3 per cent, or $7 billion. That's expected to grow by over 400 per cent to $30 billion by 2010, according to Ernst & Young.
As Levermore says, "Given the potential size of the market, there's plenty of room for more players." That may be true but even early birds cannot afford to take it easy.