The Hindu Business Line : `Become big in one format'

SHOPPERS' Stop has been expanding its footprint even as it has started to experiment with different retail formats. Mr B. S. Nagesh, the Managing Director and Chief Executive Officer of the company has been at the forefront of its initiatives. Having spent close to 15 years with the group, he has acquired a rich experience in retailing that is matched by few in the Indian context.

In a discussion with Business Line, he shared his on the hot topic of FDI in retail presented on Page 6. Here we provide excerpts of his views on other aspects of the rapidly growing industry as well as the business strategy of Shoppers' Stop.

You have pioneered the departmental store format and are now branching out to Hypercity and, of course, have Crossword. Will department stores remain a major driver of revenues?

It will be an important driver. What becomes a major driver, only time will tell. Departmental store and lifestyle retailing account for 7-11 per cent of the consumer's consumption. Eleven per cent of $200 billion is $20 billion-plus. Even if you do $200-300 million, you are still talking of one per cent.

The food or value business is $90 billion, so the opportunity is much larger. If everything goes right, that business should run faster. Whether it would be as profitable, I don't know. But we will definitely have the department store business.

Each one of them is run independently. Hypercity will run on its own and the specialty business will run on its own. We have Crossword; next we will see the first Home Store opening in Bangalore and then we have the Mother Care stores.

You are expanding into Tier-2 cities as well. Will this expansion be mainly via malls or on a standalone basis?

As of now it will be malls, because infrastructure is not in place. I require 200 car park slots for 50,000 sq ft, which I cannot create in a standalone format. In a mall, there are 1,000 car park slots with differential timings. So most of them would be at malls, but we are not saying we won't open standalone outlets. In Bangalore, our second store in Bannerghatta is a standalone.

Is a there pressure for quality space, especially Tier-2 cities?

There is no pressure for space in this country. But in retail, location is always important. More important than location is the right kind of retail environment. It is very difficult today for anyone to declare that this is the best location. When we opened our Bangalore store on Magarath Road, near Football Stadium, there was not one street-light. Today that's the densest shopping street in Bangalore. That's in nine years.

We have been going to Ludhiana for four years. My competitors have all taken properties for one lakh sq ft with 200 car parks. We have taken 2 lakh square ft with 8,000 car parks. By delaying it by three years, have we lost? Yes. But what about the next 25 years?

Today, I am boasting on your recording machine that we have done a great job. But I don't know, maybe some two million sq ft will up come tomorrow. In this country, there is no zoning. Nobody knows what can be converted into a commercial zone.

Malls tend to have lower conversion rate (visitors who turn customers). Does increased footfall offset the lower conversion?

Yes, they do and we have to look at lower conversions in a positive way. Let's take Inorbit mall in Mumbai. If you get 50,000 people on a Sunday and the conversion rate is 20 per cent, 10,000 people buy. The other 40,000 people that have come have not come to waste time, but have come to spend time. The very fact that 40,000 people spend time in a better environment has a beneficial impact.

The width of exposure of Indian consumer to modern retail is expanding. We are seeing conversions increase every year. Conversion also increases because once the initial hype of a new mall settles down, the number of people coming to the mall goes down, but the number of cash memos do not (conversion is the total cash memo divided by number of people who enter), which automatically means conversions go up.

Do you believe retailers should experiment with multiple formats or stick to something that they have perfected?

I think they should stick to a format till the time it has reached a scale, has become profitable and the employees of that format have culturally got accustomed to it. Crossword has a slightly different culture than Shoppers'.

Now if we say we will merge everything it does not work. Similarly, now after Shoppers' has become profitable and Crossword has reached a scale, we are getting into hypermarkets. But Hypercity has a different culture and so we are building a different team. There it is price, price and price. Similarly, the home store is a different one. People cannot sell home products like they sell groceries. So, culturally, each one has to be trained differently.

So I will not recommend people to get into multiple formats until and unless they have reached three things: Scale to be profitable, profitability which is sustained for two years — because these are all cyclical businesses — and you have people who can take on that project.

Then take it up, provided you have the capital to allow it. And if you can get higher return on capital through incremental growth in the current format, it is better to increase share of that format, before others coming in marginalise you. So become big enough in that format.

Tell us about your hypermarket venture...

Hypercity is a big-box format in the value-retailing business. The first store we hope to open by March 2006. We will open four stores in FY07. Four stores, big-box format, 85,000-100,000 sq ft. It will be an independent business, independent company with independent employees.

The revenues and earnings of this business will not be reflected in Shoppers' Stop's books...

Not for another year. But Shoppers' Stop has the option to buy 51 per cent in Hypercity Retail at cost plus 10 per cent until December 2008. The future hopes are with the current shareholders of shoppers stop. But the risks are not with these shareholders.

Would you bring in more private labels in that business?

That business will have a larger number of private labels, but not in FMCG. It will have private labels. We are not a 100-per cent- private label kind of retailer.

We believe that consumers will buy what they are pushed to buy by the brands. You cannot say do not buy ITC's chocolate biscuits (and buy ours instead). ITC has put in a few million dollars and we have put a few hundred thousand. So we will have ITC's and will say try it, but at your will get our private label for two per cent lower. So we will have private label, but we have to decide what company, what mix.

How will your hypermarket be different from those of existing players?

It will be different in the sense that the average size of the outlets will be bigger. The average size of the properties we are looking at is about one lakh sq ft. Others have about 50,000 sq ft. They may be larger in the future. Is one lakh sq. ft too big? We think it is too small for India.

The second differentiator is that we are looking at only one level. The competition is now looking at two to three levels.

Thirdly, the mix is likely to be different. I can only tell you that food and grocery will not be as high as others.

Do hypermarkets in India share similar features with their international counterparts?

Yes, in terms of size. A 1.2 lakh sq ft hypermarket is close to international size. You should not go to Supercenters and Wal-Marts. But they are also scaling down. By the time I park the car and go to a shop it takes me half an hour... so the convenience of shopping is lost.

And it wears you down to walk all that distance... . Retailers would make more seating arrangements in their malls...

At the kind of prices we pay landlords, I don't think we can afford to let people sit!

Shop, till you drop, then...

No, shop in our shop and drop in the competitor's shop. So we would have to encourage our competitors to have a lot of seating area.