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Big back in fashion for retailers

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Small is no longer beautiful for retailers. With customers returning to the shops, almost all retailers are now focusing on large format stores (15,000 to 20,000 sq ft or above) that allow them to sell a larger number of items and trigger higher consumer spending compared to the smaller, convenience formats where it’s becoming increasingly difficult to make money.

RPG Group’s Spencer’s, which has 220 convenience stores, plans to set up 25 to 30 larger stores by March 2010. Aditya Birla Retail is adding six to seven hyper markets. Shoppers Stop is also expanding through Hypercity after closing its catalogue stores Argos.

Reliance Retail, which has a large number of convenience stores, is not adding new stores. Barring the odd new entrant like Bharti Easyday, retailers say none of them are adding smaller stores any more and those who are left with a large pool of smaller stores are trying best to see how they can reduce their losses and run these profitably.

Bangalore-based Max Hypermarkets, a relatively new entrant in the retail business, has three outlets and is planning to add three more, all large-format stores.

‘‘We don’t do convenience stores. Smaller stores have their own set of challenges, you have to compete with the Kirana or neighbourhood store. In a larger store, you can offer more to the customer and increase share of wallet,’’ says Vinay Singh, managing director, Max Hypermarkets.

Future Group Chairman Kishore Biyani, who always believed in larger formats, says a larger store allows a retailer higher throughput and to sell value-added products and services (like processed foods and new product categories) rather than just basic commodities (food and grocery) that one ends up selling in smaller, convenience stores.

‘‘Retailers are focusing on larger formats because they have better cost structures, productivity and efficiency. In a large format, you can sell 7,000 to 8,000 SKUs (stock keeping units) or items against 700 to 1,000 SKUs in a neighbourhood store,’’ says Biyani who has stayed away so far from setting up small stores.

Anand Raghuraman, partner and director, Boston Consulting Group, says in smaller stores, retailers can sell fast moving consumer goods (FMCG) and fresh produce that offer low margins compared to, say, categories like apparel, where margins can be as high as 30 per cent.

Smaller stores also end up competing directly with the neighbourhood that operate on much lower cost structures, have established relationships with customers, and offer a range of services like credit and home delivery. Hypermarkets can have a wider assortment, offer better prices and pull in customers.

Besides, as an industry expert says, rents are too high, margins too low and there are not enough footfalls. “The problem is we have a huge installed base of smaller stores and cannot close them overnight,’’ he says.

Servicing smaller outlets can also be a logistical challenge. ‘‘Back-end operations need to be more responsive for smaller formats if you have many stores. The ability to feed a store is a Herculean task, given traffic restrictions in many Indian cities,’’ says the sales head with an FMCG major. Hypermarkets, by contrast, have more depth as a format. Since they have central warehouses, they offer double protection for carrying inventory.

But most crucially, “Customers are walking into modern trade for assortments. They are constantly exploring, seeking new stuff. That’s what modern trade is all about. It also helps you increase the ticket-size,’’ adds a senior executive with an FMCG company.

Interestingly, even as Indian retailers go for larger formats, global retailers are getting into neighbourhood formats. WalMart is setting up 60 neighbourhood stores in Brazil, while Carrefour’s first neighbourhood store in Paris is doing roaring business.

Biyani says it depends on a market’s stage of evolution. Experts say if a retailer has a robust supply chain built on the hyper format, smaller stores can ride on it.

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