Star Bazaar, the hypermarket chain of Tata’s retail arm, Trent, will take at least a couple of years more to break even, said a top executive.
According to the company’s annual report, Trent Hypermarket, a subsidiary of Trent which runs Star Bazaar, made a net loss of Rs 48 crore in 2010-11 on total revenue of Rs 520 crore. The revenue rose 80 per cent in 2010-11. Trent Ltd, which also runs Westside department stores and Landmark book stores, posted a net profit of Rs 43 crore on total revenue of Rs 716 crore in FY2011.
Since categories such as food and grocery in the business have net margins of two to three per cent and are largely dependent on volumes, the company expects the format will start making profits once it achieves a particular scale, the executive said.
The company plans to invest Rs 500 crore to take the number of Star Bazaar stores to 50 from the current 12 in the next three to five years. Trent has invested around Rs 320 crore in the business. Of the dozen stores, only four have made profits so far. Each store takes two-and-a-half to three years to break even.
“The results are in line with our expectations and based on the strong same-store sales growth in the last two years, we expect the business will eventually become profitable in the next few years,” said Trent Chairman F K Kavarana at the annual general meeting on Friday. “The business requires influx of capital and it will take a few more years before the break-even.”
According to its annual report, Star Bazaar stores are posting average same-store sales growth of 20 per cent. Same-store sales are a matrix that helps investors know the performance of stores in the business for more than a year.
Kishore Biyani, promoter of Future Group, which runs Big Bazaar stores, believes scale and merchandise mix are the most important factors in profitability of stores. While scale helps to cover lower margins, merchandise such as apparel and accessories, which have higher margins, boost it.
Though one of the early entrants in hypermarkets, Trent has opened Star Bazaar stores cautiously to focus on profitability. The delay in delivery of properties have also hit its plans in the past. After opening its first store in Ahmedabad in 2004, Trent opened the second hypermarket in Mumbai in 2007 before expanding in Bangalore and Pune, among others.
“While both Trent and Star Bazaar prioritised profitability over scale, our growth has also been tempered by a lack of properties in the right locations and at the right prices,” said Noel N Tata, vice-chairman of Trent, in a recent interview with Business Standard.
Trent entered into an exclusive franchise agreement with UK’s retail giant, Tesco, to access the latter's expertise in the supply chain, marketing, stock management and retail information, among others.
Other hypermarkets are also yet to break even. Reliance Hypermart, which runs the hypermart chain of Reliance Retail, made losses of Rs 87 crore in 2010-11. Reliance Retail is expected to take a year or two to make profits.