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| Spencer's goes off the beaten track |
| Raghavendra Kamath / Mumbai Jul 08, 2010, 00:30 IST |
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The RPG group’s retail chain wants apparel to account for a third of its revenue compared to just 10% now.
Iconic fashion brand, Bevery Hills Polo Club (BHPC), made its debut in Mumbai last week, courtesy Spencer’s Retail. The RPG group’s retail chain, which has a franchisee tie up with BHPC, wants to open 18 more such stores in the current financial year, taking the total number to 29. Spencer’s also has plans to open four exclusive stores of Ecko and two of Ladybird, in the National Capital Region.
The reason for this expansion spree in branded apparels is simple: Spencer’s, which is known more as a food and grocery brand, wants apparels to account for around a third of its overall revenue. It’s less than 10 per cent now.
Purnendu Kumar, associate vice president at Technopak Advisors, says this is inevitable given the kind of margins apparels can make. “While food and groceries fetch around 10-20 per cent margins, the same is 40 per cent for apparels and accessories”, he adds.
That’s the reason why Spencer’s is also pushing up the share of private labels in its overall revenues from 17 per cent now to 30 per cent in the next 18 months.
But the shift to non-food from predominantly food at present has been carefully planned. Spencer’s, for example, is getting out of consumer durable retailing to cut overheads. “It requires a lot of capital and space. Hence we are opting out of that,’’ Spencer's Retail President Vineet Kapila says.
Technopak’s Kumar endorses the move saying that durable retailing is not easy. “Durable retailing has margins of just 4-5 per cent but needs dedicated operations.’’ The chain has also closed all 90 Music World stores .
The decision to go off the beaten track is also in response to a common criticism that the retailer has not found a successful retail model as yet. “They have been in the business for nearly 15 years but are still struggling to find a right model. Companies such as Reliance and the Aditya Birla group have learnt from their mistakes and quickly changed their strategies,’’ says a retail consultant who does not want to be quoted.
The growing shift to non-food items does not mean that Spencer’s is ignoring its bread and butter business – foods and groceries. But the big change here is that the company is now thinking scale as that alone can compensate for thin margins.
Spencer’s is planning to add one million square feet of retail area by FY 2013 from 0.9 million sq ft now. It has closed almost half of its stores (or 20 per cent in terms of square footage) and is now betting big on hyper markets. That’s the same strategy adopted by others such as Future Group, Birla Retail, Tatas as scale alone can compensate for the 3-4 per cent net margins on which they operate.
Spencer’s will open six to seven “Hypers” in the current financial year. Even while opening stores, Spencer’s does not want to take the risk of paying high rentals for years together.” Over half of our new openings will be under revenue sharing agreements with a minimum guarantee. “Since the minimum guarantee is lesser than the revenues we make, we would gain there,’’ Kapila says. Its monthly rents have also come down to Rs 55 a sq ft from Rs 70 a sq ft earlier.
Spencer’s also worked on each of its category margins and assortments to build top line and margins. The chain saw its gross margins moving up 200 basis points in FY 2010 and is working on increasing that further, says Kapila.
Kapila says that the chain is seeing average monthly revenues of Rs 900 a sq ft now compared to Rs 834 a sq ft a year before and expects much better throughput after August when the festive season kicks in. On same store growth, he says the chain is expecting around 14 to 15 per cent growth in the coming quarters from 13 to 14 per cent now. Same store sales compare the revenues of stores which are in the business for more than a year or so.
The change in focus was necessary for the retail chain as analysts have said that Spencer’s need to double its turnover to achieve breakeven. Sanjiv Goenka, vice chairman of CESC Ltd which owns Spencer’s, feels that the retail chain needs another Rs 400 crore to achieve break-even. The company posted revenues of Rs 856.6 crore in FY 2010 as compared to Rs 1021.2 crore in FY 2009 mainly due to reduction in number of stores.
The good news is that losses came down by 58 per cent in the financial year 2010 at Rs 220 crore from Rs 520 crore a year earlier at the height of the economic slowdown. The stores have also broken even in the June quarter of the current financial year.
That’s largely because like its peers, Spencer’s took drastic measures in the last 24 months such as shutting down stores, reducing costs by 25-30 per cent among other measures. While Shopper’s Stop has turned around in the third quarter of FY 2010 thanks to these measures, some stores of Mukesh Ambani’s Reliance Retail have become profitable. Birla Retail is expecting a break-even in 2012.
“Store level break-even is a key milestone, but Spencer’s would need to walk a tight rope to implement the turnaround strategy and curtail losses from operations,’’ a report from brokerage IIFL says.
Goenka, however, is confident: “We are on track. We have cut losses significantly and sales are growing.”
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