The Hindu Business Line : The emergence of super-kiranas

Last week, the first part of this series discussed the growth of modern supermarkets in Chennai. While they are still struggling, they have made a dent – they account for 20 per cent of Chennai’s household expenditure. The traditional kirana stores, however, are reinventing themselves and growing.

When the Foodworld chain arrived in Chennai in 1996, two standalone supermarket retailers, namely, Nilgiri’s and Vitan, were already operating in the city. Nilgiri’s had already become a multi-location store operating in Bangalore (threestores), Chennai (three stores) and Coimbatore. Having been in business since 1906, Nilgiris was already a successful retail chain. Vitan, with one large store in Mylapore, was beginning to experiment with the franchisee model and had become a multi-store format. Other than these two store formats, there were hardly any large independent stand-alone stores.

Amma Naana, an independent retailer, owned and operated a 1,000 sq. ft store in 1996 – in one of the most affluent localities of Chennai. It has today grown to a 7,500 sq. ft modern store. At an annual revenue of Rs 11 crore, Amma Naana has emerged as the single largest independent supermarket retailer in Chennai.

There is now significant evidence of the emergence of large independent retailers in response to the organised modern supermarket chains. Amma Naana, 7 Stars and Murugan Stores are all examples of the new breed of retailers. They have grown aggressively and have replicated organised retail stores in format, look and feel, merchandising and in-store promotions. As stand-alone stores, they are operating a highly profitable business model. We are calling the new standalone formats the ‘super-kirana’.

This article is a case study of one such super-kirana – Amma Naana.

Historical background

Situated at the crossing of Chamiers Road and Boat Club Road, facing the Park Sheraton Hotel, Amma Naana’s location is a great one. Proprietor V. R. Govindaswamy’s father-in-law owned a 1,000 sq. ft street-front location which was leased to a retailer called Fairlands. With Fairlands re-locating to a much larger adjacent property, Govindaswamy and his wife inherited the space and decided to start Amma Naana in honour of the latter’s parents.

Since its inception in 1971, the store has grown to become a very successful store. The arrival of FoodWorld on C.P. Ramaswamy Road, barely 1.5 km away, got the Govindaswamys rather worried. They were apprehensive that their core customer group from the affluent Boat Club Road, Cenotaph Road and Greenways Road would gravitate towards the modern stores. With grit and imagination, Govindaswamy decided to buy an independent 10,000 sq. ft property just behind their store. In 1996, they converted three floors of the new building to a modern, self-service supermarket exactly in line with FoodWorld (but double its size). The Govindaswamys live on the top floor of the building and have supervised Chennai’s most successful super-kirana during the last 10 years.

Store layout

The entry to the store is through an automatic glass door which leads the customer to the forecourt approximately 1,200 sq. ft in size. This is the original Amma Naana which now stocks all the ‘impulse category’ merchandise – chips, wafers of all kinds, savoury snacks, chocolates, tobacco products and magazines. The exit, along with the billing area and its four cash tills, is in one corner of the forecourt.

The back hall on the ground floor, consisting of food, groceries, household cleaning agents and consumables, covers an area of around 2,000 sq. ft. Certain vegetarian frozen foods, fruits and a very limited spread of vegetables also form part of this main hall.

The first floor (2,500 sq. ft) is divided into two sections. Part of it has chilled and frozen meat, poultry and marine products. A very well-stocked selection of cheese and chilled and frozen food is clearly one of the best in the city. The other half of the first floor is devoted to cosmetics, skin care, hair care and high-end toiletries. Most of the counters are devoted to separate brands. There is a small basement (1,200 sq. ft) devoted to general merchandise such as kitchenware, stationery, toys, dusters and cleaners, As is well known to retailers, this section may not attract all the customers but whoever comes in leaves behind a large margin!

In all, the store layout is modern and facilitates smooth flow of traffic; its hygiene standards are far superior to most modern supermarkets that we visited. Outside the store, there is dedicated parking space for eight cars and in peak hours it can accommodate up to 12 cars. That is more than any other supermarket can boast of.

Merchandise

The merchandise offered by the store is in sync with its core consumer group that originate from the SEC A+ segment in the neighbourhood. There is a smattering of imported brands such as Starbucks Coffee, Ceylon Tea, Diana of London, Hershey’s, Country Kitchen and Thousand Islands. There are very few stores in the city that can sell a 350 gm Starbucks at Rs 945! The entire range of dry groceries such as rice, dal and dry fruits are all packaged and branded with the store brand.

A 500 sq. ft space in the basement is devoted exclusively to packing store brands and Govindaswamy is quite proud of the fact that he recently installed a modern German packing machine to replace the manual packing done till now. The store does not have any other backroom or warehouse.

Part of the merchandise is focused specifically on customer groups. For example, there are about 60 SKUs of Korean sauces to cater to the growing Korean households in the neighbourhood. In the frozen food area, a good array of sausages, salamis and spreads are imported from Europe as well as neighbouring Sri Lanka. The cheese spread caters to the European, American and higher income Indian households. The store stocks about 6,500 SKUs compared to about 4,000 SKUs stocked by the supermarket chains.

Pricing and Promotion

In contrast to supermarket chains which discount a large number of SKUs below MRP, Amma Naana sells all its branded products at MRP. A significant number of SKUs, particularly in the grocery category, are priced well above the supermarket chains’ pricing.

Unlike chain supermarkets that use ‘low price’ as the basic value offering, Amma Naana’s core offering is product range, customised offerings and differentiated shopping experience. They don’t sell on price and there are no promotions other than those offered by brand owners. There are no signage or shelf-edge stickers anywhere talking about price discounts. Amma Naana does what all the organised supermarket chains cannot even aspire to do in the near future. The store recognises all the frequent shoppers and passes on a 5 per cent discount at the billing counter.

The store has a conveniently-placed large LCD screen that operates as an out-of-home medium. Clearly, this is an additional source of revenue for this store.

During the last 10 years, gross margins of organised supermarkets have inched up by 500-600 basis points; roughly, a 50 basis point increase every year. While organised retailers believe that through bulk buying and smart negotiation, they have achieved significantly differentiated gross margins, Amma Naana disputes that theory. Most FMGG brands pass on to super-kiranas, as indeed to Amma Naana, a 3-4 per cent volume discount annually. We also observed that super-kiranas on an average are able to charge 2-3 per cent price premium over modern retailers. It is our estimate that super-kiranas such as Amma Naana are operating on a gross margin of 22 per cent compared to the best-of-class supermarket chains at 20 per cent. So much for supply chain management!

Business Model

Amma Naana is open from 9 a.m. to 9 p.m., six days a week. While all the chain supermarkets are open on Sundays, Amma Naana is cleaning up the store, doing preventive maintenance and taking stock. Most importantly, all the store staff are given Sunday off, thereby avoiding staggered off days as done by chain supermarkets.

As all the customers are aware that the store is closed on Sunday, they advance their shopping to Saturdays. Typically, while Amma Naana receives about 1,000 customers a day during weekdays, it goes up to about 1,500 on a Saturday.

Considering that almost the entire catchment area is SEC A+, the store does not witness peak shopping at the beginning of the month. We also observed that the average basket size is about double that in supermarkets that are part of a chain. At around Rs 90 lakh revenue per month, Amma Naana makes about Rs 1,200 per sq. ft per month revenue. Also, Amma Naana is the single largest independent supermarket in the city – only next to Nilgiri’s’ Radhakrishnan Salai store.

Amma Naana does not pay any rentals as the property is owned by the proprietors. The electricity consumption is approximately Rs 20 per sq ft, in line with others. Employment of frontline staff is high (50 store associates compared to 20 in supermarket chains for a store half the size). Supervision of the store involves the owners’ family members, keeping the employee payroll lower. We have constructed the profit and loss account of Amma Naana in comparison to an average modern retail store in Chennai. The contrast is palpable.

If we calculate the equivalent rental of Rs 50 per sq. ft, the emerging PBT of Amma Naana is Rs 132 per sq. ft per month. This amounts to a profitability of 11 per cent on revenue. Compare that with a negative store level margin of 8 per cent for modern supermarkets in Chennai. Amma Naana could well be one of the most profitable independent supermarkets in the world.

Next Generation

Govindaswamy’s son-in-law, Raj, has already joined the family business. Raj is an engineering graduate in computer science and is quite happy contributing to Amma Naana’s prosperity. He is obsessed with making Amma Naana more technology-savvy as well as improving its supply chain efficiency.

Will Raj convert Amma Naana into a multi-store format? Is that desirable? Is the business model of the super-kiranas sustainable or is it a temporary bubble leveraged on the inefficient supermarket chains? Only time will tell. In the meantime, small kiranas are getting smarter as well.