Spencer's Retail may break even in 18 months

Spencer’s Retail, a part of the RPG group, may take another 18 months to break even, said a senior group executive.

The retail major had earlier expected to break even in the last financial year, after recording revenues of around Rs 95 crore every month. The company’s stores broke even in the first quarter of 2010-11.

“Store level break-evens include only rents and do not include supply chain costs and warehouse costs, which are two to three per cent of revenues of retailers and overhead costs such as information technology, administration, people costs and so on, which are anywhere between 5 to 25 per cent, depending on the size of the retailer. So, company level break evens have to factor all the costs,” said a former chief financial officer of a retail chain, who does not want to be named.

Though the company recorded losses of around Rs 130 crore in 2010-11, these losses declined by 41 per cent, compared with the loss of Rs 220 crore it recorded in 2009-10. Spencer’s, which started operations in the 1990s, has recorded losses in the last few years. The company is a subsidiary of the group’s flagship company, CESC Ltd.

However, Spencer’s is not the only retail major whose break-even point was delayed. While Mukesh Ambani’s Reliance Retail expects to break even in a year or two, against the earlier estimate of September 2009, Aditya Birla Retail expects to break even by 2012-13. Both Birla Retail and Reliance Retail started operations in 2006.

“Most companies have not got their formula right, in terms of size and customer preposition. They are still trying to decide whether to go for hypermarkets or neighbourhood stores. Until they get this proposition right, they would continue to record losses,” said Naimish Dave, director, OC&C Strategy Consultants.

“We are going to drive growth through our large-format strategy, by adding hypermarkets. Consumer behaviour suggests modern shoppers are evolving and prefer shopping at larger stores, which offer merchandise across categories,” said a Spencer’s spokesperson. He, however, declined to comment on the company’s financial details.

Spencer’s, which currently accounts for a million square feet of trading area, plans to raise the figure to 2.5 million square feet by March 2014. “If we have to more than double our trading area, we have to be pan-India player, with reasonable market shares in our existing markets. We also have to consider scalability in new geographies,” the spokesperson said. “Regions like Andhra Pradesh, Tamil Nadu, Karnataka, West Bengal, the National Capital Region, Uttar Pradesh and Maharashtra would be key geographies for us to drive profitable growth.” .

According to a report by financial services firm Emkay, Spencer’s management is taking various steps to improve the company’s performance. The management has adopted a revenue-sharing model while opening stores, instead of the fixed-rent model. The company’s growth in same-store sales is expected to stand at around 14 per cent.