Vishal Krishna

Businessworld, May 17, 2010

The outskirts of Bangalore, home to many large hypermarkets, see a lot of frontier action in retail. Recently, the Raheja Group’s hypermarket, HyperCity, opened a store in Mahadevapura, where the likes of Future Group’s 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, More’s 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 Group’s retail chain is on a quest to garner greater market share in the $350-billion (Rs 16.1- lakh crore) Indian retail market. More’s 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 Group’s 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 Pantaloon’s 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.

Going Private

More’s 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, More’s 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), Kitchen’s Promise (pickle) and Enriche (personal care), across 40 categories.

But industry analysts have reservations about More’s 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 More’s in-house brands. Now, More’s 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 Retail’s 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 for More.

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 group’s 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 India’s consumer market.

But when Sinha’s 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 conglomerate’s 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.

More’s management and Trinethra’s 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 company’s turnover.

In 2009, the company was paying a whopping Rs 731 per sq. ft of retail space as compared to Pantaloon’s Rs 573. Since then, More has renegotiated rentals for 90 per cent of its stores (see ‘It’s A Tough Business’ and ‘Repenting At Leisure’). Standard rentals are now below Rs 500 per sq. ft.

“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 D’Souza, 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.

[From BusinessWorld issue dated 17 May 2010]