September 6, 2009

Durables retailers are dreaming bigger than ever before. Will they go the American way or the European? AARTI KOTHARI explores.

Large showrooms like Viveks allow for a proper display of high-end products

Modernism dismissed mythology. Environment and health hazards pulled the plug on firecrackers. Double-income families dumped diyas and rangolis. Only one thing remained constant. Diwali shopping. And this in itself has become a ritual.

First scout around the city and find the dealers. Then compare different models across different dealerships. Finally, locate the best deals. But if you live in Chennai, Bangalore or Mumbai, things are a lot easier.

Traditionally, the South has been the vanguard of organised retail in the country, now being matched by the West, namely Mumbai. Not surprisingly, in the Rs 20,000-crore consumer durables industry, these three cities represent most of the 5 per cent share of organised retail. The large players within these regions are expanding, experimenting and imagining the future. Watching from the sidelines are some 40,000 durables dealers – a majority of whom operate single outlet dealerships – across the country waiting for signs of success.

The top nine retailers in the country are set to expand their number of outlets from 148 today to over 500 by 2006-07, and revenues from Rs 850 crore to over Rs 2,600 crore in the same period. Ironically, the industry is still at a crossroads; it needs to decide the way ahead. In the US, the all-products-under-one-roof stores like Wal-Mart are more favoured, while in Europe exclusive durables-only chains like Dixons are the norm.

While nowhere close to Dixons in size, Chennai-based Vasanth & Company; Sony Mony Electronics, PlugIn Sales and Sumaria Appliances in Mumbai; and Bangalore’s Pai International and Girias have adopted the durables-only chain format. Then there are Vijay Sales and Kohinoor Televideos in Mumbai and Chennai’s Viveks- all gung-ho about their shop-in-mall forays.

But there are no strict loyalties. Nor is that possible at the moment. Being leaders, these players need to consolidate first for organised retail to take off in durables. The next five years will see mergers and acquisitions, expansion in geographical coverage, and eventually pan-India players. Only after that has happened will different formats like malls and hypermarkets become a serious consideration. Those who have set shop in malls are looking at those stores on a four to five year perspective and not as significant contributors to their sales immediately.

Why the rush? Largely because the current retail revolution in FMCGs and fashion has whet their appetite for scale and experimentation. Take a look at the newest entrant, PlugIn Sales. Though it started operations only in July 2003, it already has 23 multi-brand outlets in Maharashtra. Says Nitish Tipnis, CEO, PlugIn: “We want to give our customer the same hospitality hotels render. That 35 per cent of our customers have come back to us is proof that we have arrived.” The business model is similar (though smaller) to Hong Kong’s biggest player, Fortress, which has 40 showrooms of a maximum of 2,500 sq ft each, with the exception of a single 50,000 sq ft anchor store. With its Pune operations doing better than Mumbai and several established players in Mumbai already, the company has decided to keep a foothold in Mumbai while focusing on the rest of Maharashtra.

Higher scale, higher costs

With size comes power. And higher costs. Durables companies are finding this out as they negotiate with the new durables retail chains.

Cost rides on scale, as the cost structure of retail chains goes up with advertisements, air conditioning, staff and high-end real estate. All these could add up to 8-9 per cent of the selling price for bigger dealers – and they expect the companies to share a bit of it.

“There’s a far greater amount of price negotiations that takes place,” says a marketing head with a durables company.

However, all this investment also means more power. The bigger players are growing faster. “Earlier, if 80 per cent of my sales came from smaller dealers, and 20 per cent from bigger dealers, today 40 per cent of my sales is coming from bigger dealers. So, on a higher proportion of sales we are incurring a higher cost,” says a marketing head of Mumbai-based company. But companies also don’t mind spending more on bigger dealers, as the extra spends are made up by higher volumes. “The absolute cost could be higher, but the per unit cost might not be higher, as the expenses are spread over larger volumes,” says Salil Kapoor, head of marketing, LG Electronics.

Smaller shops are typically owner-run, have lower real estate costs, don’t do much advertising and keep a smaller product range. Companies have to support bigger dealers by giving a higher margin, or through merchandising support, which can be 1-2 per cent of the sales value. Yet there is no sudden change: costs have been going up for awhile and marketers have built this cost into their sales structure.

Corporates are also getting into it. Eureka Forbes is creating a chain of Home Stores, while Raymond has promoted PlugIn. Experts feel all this would lead to consolidation of retail in the next two to three years.

To keep pace with the market, a traditional retailer like Viveks has reinvented itself. After corporatising its operations in 1995, Viveks acquired Jainsons, the third largest chain in Chennai in 1999, and subsquently, another small chain called Premier. Today it is the largest durables dealer in the country and the only chain with three brands in its kitty. It has 46 outlets across Karnataka and Tamil Nadu, and plans to reach 100 showrooms by 2008. Together with its closest competitor, Vasanth, it accounts for Rs 400 crore out of the total durables market of Rs 1,500 crore in Chennai, while the remaining Rs 1,100 crore is split between 400 small retailers.

Vijay Sales has been around as long as Viveks, but has a slightly different tack. It has a turnover of Rs 150 crore from just nine showrooms in Mumbai. This is because – unlike Viveks’ average showroom size of 2,500 sq ft – three of its nine outlets span over 20,000 sq ft each, while the others are between 5,000-12,000 sq ft. “In most cases, around 10-30 per cent of a manufacturer’s sales in Mumbai comes through us. In four years we’ll expand to Pune, Nasik and Nagpur, among other cities, and then maybe outside Maharashtra,” says Nilesh Gupta, managing partner, Vijay Sales. It accounts for half of the city’s high-end products sales.

There is another rung of players (turnover less than Rs 100 crore) like Kohinoor, Sony Mony and Sumaria in Mumbai and Girias and Pai International in Bangalore which are nowhere near the top three in size, yet enjoy strong customer loyalty. What makes them noteworthy are their ambitious plans for expansion. Sumaria has scaled up from one to six showrooms in the last three years and will open another four in the next six months. Sales have been growing 25 per cent year-on-year. Says owner Prem Shah: “It’s a no go but to expand. Unless you buy in bulk you can’t survive today. My purchases have increased four times in the last three years.” At Sony Mony, growth has been sporadic. Having started with a 1,000- sq ft showroom in 1986, it took 14 years till the second branch in Borivali (5,000 sq ft) came up. However, in May this year, it leap-frogged to a 22,000 sq ft showroom spanning three floors in Ville Parle. Says Ramesh Shah, managing director: “We’ll open five more showrooms (5,000-10,000 sq ft) in Mumbai by 2007, then move on to other metros. Delhi is definitely our first choice.”

In Bangalore, Girias is the third largest player operating in both Karnataka and Tamil Nadu. It plans to add eight more outlets to its existing nine by 2009. Says Navin Giria, director of Girias: “This might seem slow, but all our properties are self-owned.” Its close competitor, Pai International, differentiates itself through customer service and relationship building. “The products are all the same. We may even charge Rs 100-200 more than competition, but our customers keep coming back to us because we offer them superior service,” remarks Pai’s general manager Suraj Nayak. With seven showrooms across the city spanning 2,500-25,000 sq ft, he has plans to enter a mall to boost Pai’s brand image. But not immediately. He’d rather wait and watch how his competitor Viveks fares.

Strangely, unlike in FMCG and lifestyle products, malls have been ignored by durables. Retail consultant Devangshu Dutta says: “Real estate is the single biggest stumbling block. Margins in the industry don’t lend themselves to being in malls. While in other markets like the US and Europe, rental costs could comprise 1-6 per cent of sales, in India the figure can be as high as 12 per cent. However, malls will be the biggest push for organised retail in the next 4-5 years. Rentals will have to come down.”

Those who’ve ventured into malls have had mixed experiences. PlugIn’s 1,000 sq ft. shop-in-a-shop with Arcus in Phoenix Mills is going to break-even much after its earlier timeline of one-year. Says Tipnis: “Our customer feedback shows that durable purchases are still a neighbourhood activity for ease of repairs and servicing. But Arcus is a home store, so it makes sense to have durables there too. We’re looking at it on a three to five year perspective, and since our investment is low, we’re going to keep this space.” Prem Shah tried it with Sumaria, but says it wasn’t a success because mall shopping means impulsive decisions for lower-cost goods.

But Viveks believes malls are here to stay. Says B.K. Vijay, associate V-P (CRM), Viveks: “Malls are promising if you don’t go overboard on investments. The products moving out of there are from select high-end categories, so no point stocking up like any other outlet. Customers want a known brand. A new one would not really take off immediately.” Viveks is in two malls in Bangalore – Forum and Central – and at the Spencer Superstore in Spencer Plaza, Chennai, each spreading over 1,000-3,000 sq ft.

But these are all small scale attempts. Competitors are holding their breath for the verdict on Vijay Sales’ 23,000 sq ft one-floor space at ‘The Hub’ in Goregaon, Mumbai. Says Ramesh Shah: “We didn’t want to miss the bus, so we took a gamble. The choice was: small or big? We decided to go the whole hog since there’s no market on the expressway between Bandra and Borivali. So, if it works, we get the first-mover advantage.” The weekends see 70,000-80,000 footfalls. The strategy is to offer ‘best deals’ in the lower-end products, as malls are about impulsive buying. Shah is hoping to break-even on all investments in three years and on operating costs in 1.5 yrs. The goal is to get 15 per cent of Vijay Sales’ total turnover from this showroom in the next six months.

It will still be some time before we can gauge the success of malls in this industry. For now, B.A. Kodandaraman, chairman, Viveks, says: “Studying the West shows us only one way ahead…. All these companies (Dixons in the UK, Wal-Mart in the US and Kingfisher in Europe) had a humble start of one brand, one store, but today they have a minimum of a dozen brand names under which they operate their 100 to 4,000 stores in multiple countries and multiple continents.”