Retailers take the differentiation call


July 16, 2013

Sayantani Kar, Business Standard
Mumbai, July 16, 2013

A few weeks ago, taxis painted with familiar multicoloured stripes waited at toll booths at entries to the city of Thane to ferry passengers for free to a newly-launched hypermarket. HyperCity, the Shoppers Stop-promoted grocery chain, had opened shop in a new mall. It had even advertised waiving of toll tickets for shoppers who did not take the cabs.

Not just shoppers in Thane, it was clearly gunning for ones in locations beyond it, which are in no way underserviced. Hypercity itself has another outlet in close proximity.

Driving footfalls is indispensable now with rising grocery bills. Hypermarkets are battling consumers looking to cut consumption. But playing on price by offering lower rates might not be the way out. Devangshu Dutta, CEO of the retail consultancy, Third Eyesight, says "Retailers want not to bring down the grocery bill but to drive more footfalls and increase the total basket size of the consumer. When consumers cut discretionary spending, retail brands have to ensure a mix of merchandise that will be high on items consumers don’t downtrade on or cut."

Promotion weeks

Ashutosh Chakradeo, chief merchandising officer at HyperCity Retail says, "For the last three months, every Friday we have gone in for our ‘Blockbuster’ promotions of one or the other kind. We are aware of the customers feeling the pinch, hence, we have stepped up our promotions that help us retain the footfalls. We see around 25-35 per cent growth in footfalls due to our Friday promotions."

"Individual promotions by the retailers can save anywhere between 10-30 per cent on the consumer’s bill. But physical combo-baskets that retailers offer (combining various household groceries for a all-in-one offer) actually make the consumer increase her basket size with products she might not have intended to buy," says Dutta. He points out that pricing power is also limited for the retailer because of maximum retail price on most branded products that users buy. It does not allow pricing flexibility as seen in the US, and neither does the APMC markets, which don’t allow retailers to go the farm-to-fork way in fresh groceries. "But these are loss leaders, segments where retailers anyway take a hit because they drive footfalls. Retailers can then increase the basket size of the consumers who walk in with other products of higher margins using visual merchandising, promotions and shop layouts," explains Dutta.

"Spencers has not seen much of a slowdown because we still enjoyed 16 per cent same store sale growth last year and clocked 14 per cent growth in April-June, this year," says Mohit Kampani, president and CEO at Spencer’s Retail, RPSG’s retail business, when same store sales of some players have been in the single digits. Kampani mentions its ‘price architecture’ model that ensures a store also stocks the lowest-priced variety available in the catchment area. That leads to Spencer’s storing 22-25 per cent more SKUs (stock keeping units or varieties of a product) than others, claims Kampani. "But then our sales per square-feet are high and hence it does not lead to large inventory. Most hypermarkets play the price game so we have to spend more to discount for the consumers too," says Kampani. He says that it had increased discounting from 0.7 per cent to 0.8 per cent over the last year.

Potent merchandising mix

Kampani mentions Spencer’s wants to sharpen its focus on food, with a decent balance of non-food groceries. "Not only do we have more than the usual 12,000-15,000 SKUs in food but we have been rolling out our experiential counters at all our hypermarkets. These include a delicatessen, bakery, gourmet spice and dry fruits counters," says Kampani. Merchandising is done inhouse, unlike some players who outsource such sections. It has tied up with trainee sommeliers to advise consumers in the liquor section and trained staff to interact with shoppers in the bakery. Such measures increase the confidence of the shopper, especially when she is looking to add items that are new to her basket.

A lot of hypermarkets are incorporating similar strategies with a focus on food, despite lower margins than merchandise like durables and apparels.

Ankur Bisen, vice-president (retail and consumer products), Technopak says, "Brands have moved away from larger formats and the higher margins in non-food are being traded-off by some retailers for food which is inflation- and recession-proof." Kampani says that food and groceries have not seen downtrading but premiumisation has suffered. But even then, items in personal care categories have felt no such pressures.

However, for some, an equal focus on non-food is working out. Bisen also says that retailers are increasing their categories that are brand agnostic but command high margins such as plasticware, tableware, and apparel like plain t-shirts and innerwear. Hypercity, which is yet to break even at a company level, claims they have achieved operational profitability at an overall store level through such a mix. Chakradeo says, "We are focusing on high margin categories such as apparels and home, which are seeing upfront placements in our stores, investments and also new products. For the last seven quarters (since 2011), we have been profitable at the overall store level. Our target is to achieve company-level profitability now."

Cutting down to size

Right-sizing the stores are also seeing hypermarkets unlock greater profitability. Bisen says, "Retailers have been rationalising the space in their hypermarkets, as we would see empty aisles in big box formats earlier."

Chakradeo says, "We are aiming for profitability through leaner and compact stores." HyperCity may have started with big box stores seen in the US (huge areas with a vast merchandise mix) but it is now focusing on smaller stores. "Apart from the big box model comprising 50,000-60,000 square-feet space, we have our penetration stores, measuring not more than 30,000 square-feet. These are to grow in cities we are already present in." In fact, hypermarkets are increasingly exploring cities they are already present in to make the most of economies of scale. "Overall, there are huge cost savings – in advertising promotions, and supply chain. Why spread across 10 cities for Rs 1,000 crore in revenue, when you can get the same from just five?" asks Chakradeo.

Kampani of Spencer’s says, "We wanted to get rid of artificial space dedicated to non-food. The larger call for us is to go for compact hypermarkets. Because, organised players cannot beat traditional markets in non-food items because they are already strong. So, we have chosen to complement them rather than compete with them."

Just as Hypercity went all out to bring traffic in for the new mall, malls too are extending additional support to their potential anchor stores. One of the players point out that new malls in cities like Bhopal and Ranchi are customising research to explain the catchment area better, waiving leases for the first few months to ensure profitability of the hypermarkets, opting for rent payments after the store turns profitable.