Mid-level retailers show the way big boys falter

D Mart clocked Rs2,400-crore sales in FY12—40 per cent more than what the 55-store chain did in the previous financial year.

The sales of the city-based entity, promoted by stock broker

R K Damani, were 92 per cent more than national retailer Spencer’s Retail’s Rs1,251 crore. The mid-level retailer’s sales were better than even another national retailer – Aditya Birla Retail. Though its FY12 numbers are still not out, analysts say Aditya Birla Retail will not be able to clock sales of more than Rs2,000 crore, given that it closed down 50 supermarkets to stem losses. Its 2010-11 numbers were Rs1,637 crore.

 

The 12-year-old D Mart is not only profitable at the entity level, but most of its stores are also in the black, says a company executive. Spencer’s, on the other hand, is still making losses. (It posted Rs220-crore losses in FY12.)

While retail biggies are still working overtime to cut losses, mid-level chains are walking away with profits, low debt and steady growth plans.

Take for instance, Bangalore-based Namdhari’s Fresh, a unit of seeds producer Namdhari Seeds. Its chairman and managing director, Uday Singh, says the chain— which runs 20 stores in Karnataka’s capital city—attained cash break-even last year and is looking at four per cent profit at net level this financial year. The company has negligible debt on its books, and the chain is looking at a sales growth of 20 per cent this year.

In Chennai, electronics and durables retailer Vivek’s also has a similar story to tell. “The company is 100 per cent profitable and 99 per cent of our stores are profitable,” says its 73-year old chairman and managing director B A Kodandarama Setty. He, though, does not want to disclose profit numbers as the chain is privately held.

It posted sales of Rs440 crore in FY12, and is looking at a revenue growth of 32 per cent growth in the current financial year. The chain has 47 stores and plans to add 10 more in FY13.

So, what makes the regional, mid-level retailers click?

Low overheads, strong supply chains and consumer connect are three things that have made these low-profile chains successful in the markets they operate.

D Mart, for instance, pays its suppliers within 48 hours of delivery, making two-three per cent additional gross margins which it passes on to consumers. Most of the retailers buy goods on credit from suppliers on 30 to 60 days’ credit.

D Mart stores are six-seven per cent lower in prices in most of the locations, says an Aditya Birla Retail executive. D Mart’s biggest benefit is it owns 48 out of the 55 stores it operates, thereby saving six-10 per cent of sales which goes towards rent.

“They do not spend much on interiors unlike bigger retailers who spend a bomb on them,” says the executive. “Besides, they open stores in inexpensive neighbourhood locations.”

Hyderabad-based Heritage Fresh and Namdhari’s have made retailing of fruits and vegetables their core strength which is not a favourite area for many big retailers due to lower margins and wastage of around four per cent due to lack of proper supply chains.

Heritage Fresh, promoted by former Andhra Pradesh chief minister N Chandrababu Naidu, sells two times more fresh fruits and vegetables than the local supermarket in the city. It has built two pack houses in Shantipuram in down-state Chittur district and the capital Hyderabad, to process fresh produce. The first facility handles 200 tonnes per day and second one handles half of that.

Since its parent, Heritage Foods, has dairy and bakery units, the retail arm sources most of its requirements from them. Besides, 50 per cent of its back-end revenue comes from other retailers who use its services.

“It is a challenge to handle fresh produce,” says S Jagdish Krishnan, chief operating officer, retail and bakery divisions, at Heritage Foods. “For, it goes through the farmer-broker-wholeseller-retailer chain which roughly takes a day. If we work along with farmers and process it quickly, we can sell it profitably.” Besides, it also has a 50-member team which procures 55 per cent of its fresh produce locally in the areas where it operates.

Though Heritage Fresh is not profitable at the entity level, Krishnan expects that to happen soon with better cost management and limited expansion.

Singh of Namdhari Fresh says 50 per cent of sales come from fresh produce. Its USP: Fruits and vegetable with low pesticide residues and good quality produce. Its parent Namdhari Seeds either grows fruits and vegetables or goes for contract farming.

“Though prices are higher in organic vegetables, we guarantee the quality of the produce,” says Singh of Namdhari’s Fresh. “There are loyal customers for that. We are competitive in commodities such as potatoes and onions.”

Big national chains have not been able to make their mark in fresh produce, says Harminder Sahni, chairman and managing director of Wazir Advisors, a retail consultant. “Most of the fresh produce becomes stale by evening. They cannot compete with local hawkers in most of vegetables and fruits,” Sahni says. “You can manage that if only you have strong supply chains.”

Vivek’s, says its chairman Setty, has built strong customer connect and back end support.

It has one of the largest multi-product, multi brand service centre in the country, where 400 service staff and 120 skilled technicians work, who provide after-sales, collection and delivery services to customers in Chennai.

So whenever a customer buys a big product like air-conditioner, its service centre is informed about the purchase which in turn calls the customer and says it will send technicians to install it. Its technicians get in touch with customers and install it.

“Since we are in 14 locations in Chennai, customers need to travel only three kilometers in Chennai to reach our stores,” Setty says,

There are some challenges as well. “Getting the right talent and right properties are the big challenges,” says a D Mart executive. While D Mart is at least expanding in the South and wants to be a pan-India player, others such as Namdhari’s and Heritage are content with being confined to their home markets.

As against his earlier plans to open 100 stores, Singh of Namdhari’s says the chain would open just three to four more stores and consolidate it base in Bangalore. “We will grow our retail business slowly. We are seed growers and retail is forward integration for us,” he says.

Similarly, Heritage had to struggle in Bangalore and close stores which are dominated by hypermarkets such as Spar, Big Bazaar and others within a radius of 1to 1.5 km radius.

“Stores of 2000 to 3,000 sq ft tend to struggle in Bangalore which has many hypermarkets. We are devising a different strategy for Bangalore,” says Jagdish of Heritage.

The chain, he says, will focus on dominating its main markets such as Hyderabad and Chennai before expanding into others.