Retail chains are now sold on smaller shops

Small is suddenly big in the world of retail chains. Faced with low throughput and higher costs, retail stores are becoming more compact and more focused. The new wisdom is that this allows not only cost cutting, therefore, better revenues, but also easier availability of rental space.

Hypermarkets are normally sized in the region of 50,000-70,000 sq ft. Retail chains like Spencer's Retail, Rahejas-owned Hypercity, Aditya Birla Retail's More and Bharti Retail's Easyday now plan to shed acreage and go in for 'compact hypermarkets' that are around 30,000 sq ft in size. These would be much smaller than the regular hypermarkets, but more spacious than supermarkets and stores with 1,500-6,000 sq ft floor space.

Take the RP Sanjiv Goenka group-run Spencer's Retail. The chain plans to open 47 hypermarkets in the next three years that have an average size of 30,000 sq ft. "The western concept of 55,000-60,000-sq-ft stores does not work in India, given the cost structures. Secondly, the kind of space hypermarkets abroad dedicate to apparel, we cannot do here," says Spencer's chief executive officer, Mohit Kampani.

Indian food and grocery retailers pay 5-6 per cent of their revenues as rent, which is almost double of what retailers pay in the west. Kampani says that compact hypermarkets have 15 per cent higher sales per square feet than regular hypermarkets.

Currently, the average size of Spencer hypermarkets is 25,000 sq ft. Since the chain plans on increasing the share of apparel and other categories that carry higher margins, the size of stores will go up to around 30,000 sq ft.

Hypercity opened two compact hypermarkets this year in Whitefield in Bangalore and Vadodara in Gujarat and more inaugurations are in the offing in the coming financial year.

Clearly, as they chase profitability, retailers seem to have learnt from their past mistakes. Govind Shrikhande, managing director of Shoppers' Stop, which owns Hypercity, says the idea of expansive stores such as its flagship 120,000 sq ft establishment in Malad in Mumbai, does not work everywhere. "We thought we would benchmark our Malad store and replicate it in other parts of the country. But the Mumbai store worked only because of the neighbourhood it catered to. There are very few places where we can run large stores," says Shrikhande.

"Smaller stores are better in terms of cost management and profitability," he adds, saying that Hypercity is gunning for a break-even in the next 24 months. And to prove that going small is a question of getting the right balance, Hypercity's 10,000-sq-ft stores, called Express City, have not worked out well for the chain.

"It is just that the economics of large stores do not yield good results. In smaller-sized stores, retails can keep the right merchandise to help maximise revenues and profitability," says Abhishek Malhotra, vice president and partner at management consultancy Booz & Co.

As they reduce sale space, retailers are leaving out big-ticket items that take up substantial space but are slow-moving categories. Hypercity's compact hypermarkets do not sell consumer durables and furniture. The More chain also experimented with a compact hypermarket of 30,000 sq ft in Jayanagar area in Bangalore last year, selling grocery and general merchandise unlike its other two stores in the city which sold consumer durables and apparel too. Similarly, Spencer's mostly stock carry-value brands such as BenQ and Micromax in electronics rather than a full product range.

Some retailers are going even smaller. Tata's Trent, which runs Star Bazaar-branded hypermarkets, recently opened its neighbourhood store called Star Daily in Pune. It is comparatively tiny at 1,800 sq ft and sells fresh foods, groceries and items of daily use.

Many in the industry believe that the delay in opening of new stores and lower throughput in many stores forced Tatas to contemplate smaller stores. Last year, Star Bazaar could not open a single store due to delay from developers.

However, small-format stores have not stood up to the profitability test. While Chennai-based Subhiksha and Mumbai-based Spinach completely exited the business, Mukesh Ambani's Reliance Retail has stopped expanding its neighbourhood stores called Reliance Fresh.

WHY THEY ARE DOING IT

* Higher sales per sq ft
* Easier to book spaces
* Lower realty, overhead costs
* Better for early profitability