Step By Step


April 29, 2013

Amrita Roy, Ankita Rai & Masoom Gupte, Business Standard

New Delhi/ Mumbai April 29, 2013

On an unremarkable day in 1991, Ramnath Nalli, grandson of Nalli Chinnasami Chetty, who set up the first Nalli Silk store in Chennai in 1928, decided to check out if there was a market for Kanjivaram silk saris in the country’s fashion capital. He organised an exhibition-cum-sale of its products at New Delhi’s Pragati Maidan and showcased an exquisitely crafted range carefully picked from his enviable repertoire. The event was a sell-out, and spurred him on to step out of his stronghold and set up his first Delhi store that year. Today, Delhi is the second largest market for Nalli after Chennai.

Nalli Silk’s journey from Chennai’s T Nagar to locations across the subcontinent and beyond mirrors the growth curve of many other home-grown, family-run retail chain brands in India. Indeed, if in the early days of national television regional and local brands scrambled for a national presence, recent years have seen ambitious local retail outfits take the leap of faith. A whole host of factors have come together to encourage them to leave their comfort zones and explore new markets.

Devangshu Dutta, chief executive, Third Eyesight, a consulting firm focused on the retail and consumer products ecosystem, explains why in the last decade or so, so many stand-alone, single-store brands have set about building critical mass. “One reason is ambition. By itself it can be a great enabler,” says Dutta. The arrival in India of global chains fuelled the ambitions of the local players. This ambition has been driven by exposure to modern retail and the media focus on it, creating an environment for the family-run enterprises to grow, he says.

The significant growth in commercial real estate over the past decade has provided ground for the ambition to spread roots. “In the last few years so much more retail real estate has become available, bringing down capital investment and improving the profit multiplier significantly,” adds Dutta. Earlier, a retailer seeking to open a new branch would have to typically invest in building the physical infrastructure ground up. The growth of malls and modern commercial complexes even in tier II cities, however, offers opportunity to set up bare-bone kiosks. What has accelerated the process is easier access to capital. “Apart from institutional capital, even before you become a serious contender for PE funding, there are investors you can approach,” points out Dutta. Then there is the changing profile of the entrepreneurs – many are second and third generation members of the promoter family and young, often with foreign degrees in technology or management. “These people are loath to come back to the family shop and sit at the cash counter. They have global exposure and have, quite often, started their careers in the corporate sector. For them, just running a store or two offers no challenge. They will return to the fold only if they can script a growth story,” says Dutta.

However, many entrepreneurs with successful single store operations dither over questions such as when is the right time to do it, what would be the best route forward – do it alone or with franchisees? We studied a dozen such chains, which grew from being single stores, for answers. Here we would like to put together a road map for expansion for brands looking to establish a chain across markets.

The liberalisation proved to be a turning point of sorts for many established Indian single-store brands. Some perished, unable to adapt to the changing times and tastes and ceded ground to the bigger brands and multinationals. The more nimble ones – such as Nalli Silk, Lawrence & Mayo or Vijay Sales – saw opportunity for brand building. The cases we will discuss started their journey as single-store enterprises; they had one other thing in common – unmatched brand equity, which they cashed on as the markets opened up.

Start from the beginning

According to Vivek Mendonsa, director, Lawrence & Mayo, the foundation of a successful chain rests on the four pillars of location, understanding of the market, concept or value proposition, and the knowledge to execute, or LUCK for short. If you are a successful one-shop enterprise looking to make the transition, the first question to ask is, whether your business – its format or model or its very nature – is amenable to the chain format. If the nature of the business is such that its brand equity is solely dependent on a unique factor that cannot be replicated across multiple outlets, then developing it into a chain will adversely affect the brand. For example, if you run an adventure camp in a Himachal valley, it’s unlikely that you could replicate the same model in Goa. Another question to consider, particularly for the service-oriented enterprises, where the main differentiator is the quality of the customer’s experience of being served, is how to maintain standards across multiple locations. For a beauty chain, or a restaurant, where reputations can be made or marred by a hairdresser’s attitude or a waiter’s promptness, it is difficult to ensure the same standard across locations. With continuous training of personnel and strict monitoring mechanism in place such risks can be mitigated to an extent, as the success of chains like Shahnaz Husain salons or the Oh! Calcutta and Mainland China brands of restaurants run by Speciality Restaurants Ltd (SRL) testify.

Also, the economies of scale are not equally applicable. According to Nilesh Gupta, managing partner and CEO of Vijay Sales, a white goods and electronic gadgets retailer, economies of scale don’t work beyond a point in this segment. Once you have crossed the threshold of 15-20 stores, returns tend to diminish as certain costs – like that of inventory – don’t go down. What goes down is the time taken to draw in the customers. “We are in the technology space and every time a new technology comes, it has to be made available to the customer,” he says. “Even now we take 45-50 days for a physical store opening. But where earlier it took us about two to three months to start attracting customers, we now have them coming in from day one at any of the new stores.”

After you have figured if it is a good idea to establish a chain, the next big task is to identify the best location/market you should head for. Being in the right location is crucial for the survival of any business, especially in the retail, service or hospitality sectors, where accessibility of the store and the demography of the potential customer base directly impact footfalls, avers Kamal Tandon, CEO, Nalli Group. Lawrence & Mayo, which was started during the British rule to serve an exclusive clientele of royals, industrialists and high ranking civil servants, operated five stores across undivided India. When much of its client base vanished with Independence, it changed tactics and targeted a wider base of customers and expanded into a chain. The 94 stores it currently runs are located near established markets. Mendonsa says more than 25 per cent of the assets are completely owned by Lawrence & Mayo and some of these are high street and marquee properties, given the brand’s aspirational positioning.

Aspirational or not, not doing due diligence while looking at a location or site could be a fatal mistake, warns SRL founder and CEO Anjan Chatterjee. “It is important not to over commit on fixed outgoings in developing locations where actual population is not enough to generate the kind of footfalls that will justify the rent,” he adds. SRL has roped in Jones Long LaSalle and Knight Frank to research the demography of a new city/location before zeroing in on properties. For her salons, Husain’s company insists on properties on ground floors with good frontage or first floors with easy accessibility.

Being in the right market is an absolute must. “Apart from understanding the overall potential of a city, a good strategic location is also important,” says Gupta of Vijay Sales. For its part, L&M does not venture into cities with less than 10 lakh population, while the Nalli brass believes that if the size of a market is right, there may even be several Nalli stores in the same market. “The metro cities are expanding very fast, making it difficult for customers to commute from one end to the other. People are cutting down on destination shopping. So we see potential even in cities where we are already present. In Bangalore alone we have four stores now. We are also expanding in tier II cities; we have opened in Kanchipuram and Coimbatore. We looking at Gurgaon and Chandigarh in north India,” says Tandon.

Know your market

Needless to say, the nature and quirks of individual markets is another factor that determines how successful a chain is likely to be. “Credit cards and EMIs don’t work much outside big cities and one can’t bank on these to push sales,” says Gupta. Another important lesson to remember, he warns, is that even in today’s highly connected world, brand equity takes time to build. “When we entered Surat, we had advertised fairly heavily. Yet we had to contend with questions like ‘Who are you? How do I trust you?’ I asked the customer who posed this question if he had relatives or friends in Mumbai. They could tell him whether he could trust us or not. It was a lesson that brand equity cannot be transferred automatically,” adds Gupta.

Besides, in new markets with established local players, consumers take a lot of convincing and aligning with local festivals is a smart way to generate trust.

The next question to ask is whether to go it alone or scout for franchisees. After much deliberation Vijay Sales opted for the company-owned-company-operated (COCO) route. “We find that the franchise model doesn’t work in our business because we are not selling our own brands. There is no value addition since we work more as amalgamators of brands. If we were to bring on franchisees, they’d quickly learn the ropes of our business, gather the necessary experience and branch out on their own,” says Gupta.

SRL follows a combination model. A large number of its stores are under COCO and it also has a few franchises. Even when the restaurants are owned by the franchisee, the operations are managed by the company (franchisee owned, company operated).

“We are in the fine-dining business and hence our main offerings – food and service – cannot be mechanised like you can do in the quick service space,” explains Chatterjee. He says the franchise model was looked at only to help speedy expansions primarily in smaller cities and bridge the gap of initial capital requirements needed to set up a new outlet.

The next big question is how to raise the capital required for fresh investments. While most brands have said that the initial funding came from internal accruals and bank loans, once a standalone store brand has established brand value and demonstrated scalability, raising funds gets easier. If the sector you operate in is growing fast, the job is 75 per cent done. The rest depends on how you sell your dream to the potential investor.

Take the eye care segment. The size of the organised industry is about Rs 1,000 crore and the unorganised segment makes up another Rs 2,000 crore. There are national chains like Lawrence & Mayo, Titan Eye+, Vision Express, besides regional players like Gangar (in Mumbai and Pune) and Dayal Optics in New Delhi. The opportunity is huge and what can work for large regional players is the kind of trust they enjoy in their home base. That’s precisely the lever that players such as GKB and Himalaya have used to their advantage and that’s the reason why we have seen specialty eyewear becoming such a hotbed of competition in recent years.

Chatterjee says VCs find the restaurant sector quite attractive. Macro factors like the growing quality of life and the scalable nature of the business make it an attractive bet. The organised segment would be Rs 28,000 crore by 2015 with a CAGR of 30-32 per cent, he points out. But profitability at the store level is a key challenge. Food inflation has been in double digits in the last three years, affecting the margins.

In sum, the going won’t be easy even though you feel you are ready to stretch the equity of your brand across markets. Whichever market you might be in, it is a good idea to remember the first rule that every business text book propounds: that sound market knowledge underpins success and all business ideas must be tested thoroughly before launch.