The Spencer's experience

RPG’s retail arm Spencer's hopes to come out of the red in less than a year. Here's how.

Right at the beginning, Spencer’s, the retail arm of the Rs 13,500-crore RPG Enterprises, made a candid confession: Making profits would take some time and shareholders should be prepared to lose money for some years.

That was in 2005. Since then, the fortunes of the sector have taken a turn for the worse. High rentals and lower buying have eroded profits. Discount stores as well as large stores are on oxygen. Yet, RPG Enterprises Vice-chairman Sanjeev Goenka says losses are down 45 per cent and well within budgets. More important, Spencer’s, he adds, will turn the corner in the last quarter of the current financial year.

 

Not that the losses should bother Goenka too much at the moment. In 2008-09, Spencer’s was merged with CESC, the power utility (2008-09 turnover: Rs 2,775 crore, net profit: Rs 355 crore) that serves Kolkata. This company sits on cash reserves of Rs 2,847 crore (as on March 31, 2008). Some of that could cushion Spencer’s’ losses for a while and also provide it growth capital in the days to come.

The right store
In January 2007, Spencer’s began to reposition its brand and roll out the “right” store in association with a Canadian retail consultancy called Perennial. Spencer’s felt modern retail had discount retailers at one end of the spectrum, which offered the cheapest but not the best product for the masses, and luxury retailers for the rich at the other end. Spencer’s decided it wanted to be between the two, in the huge segment for buyers who saw shopping as an experience rather than a mundane household chore, desired wider choice, novelty and quality within a better shopping environment. Its earlier mantra of “Smart Ways to Shop” was thus replaced with “Taste the World” to reflect this change.

“It is a trusted brand for food and grocery which offers a world class shopping experience in terms of assortment, innovation, quality and store ambience,” says Samar S Shekhawat, vice-president (marketing), Spencer’s Retail.

Its merchandise play straddles verticals like fashion, electronic and electrical appliances, home care, home décor, books, music and IT products with product ranges in the “mass-premium” range. The new Spencer’s stores have “logical category adjacencies” so that shoppers move from category to category conveniently. Food and grocery are fresh green in colour, fashions are in violet, electronics and multimedia in blue, and furniture and home goods in red, says Goenka, to guide the consumer.

For the “edutainment” of customers and to improve interactivity, Spencer’s runs a live kitchen that demonstrates recipes from world cuisine (sushi, satay and fondue, for instance) in which chefs use ingredients displayed on the specialty bays. There are also guides who take buyers through wines from 11 countries.

This has helped. Shekhawat claims these steps have combined in generating 70 per cent loyalty and repeats, as well as double the industry conversion rates and average customer bill value. Its sales (per square foot) have risen around 15 per cent in the last one year.

The new positioning shows up in the store locations too. Spencer’s has relocated about 100 loss-making stores from unviable to viable catchment areas. Shekhawat says the company will focus on 13 clusters as category ‘A’ markets with higher immediate potential for organised retail and stronger brand equity for Spencer’s which can be leveraged, and more robust backend and logistics already in place in geographically contiguous territories. The benefits post the consolidation were higher revenue per square feet of sale by 10 per cent and greater contribution by higher margin categories such as fashion, home and entertainment.

The company also realised that with its range of merchandise, bigger stores made better sense. Since large space is involved in such stores, the company is able to negotiate better rentals. Once store restructuring is done, the ratio between large and small stores will be 50:50 in terms of trading area and contribution to business over a 12-month period from 55:45 now.

According to Goenka, such stores give the 360-degree Spencer’s experience and sell more high-margin items like apparel and consumer electronics and what he calls the “home work and play” products. At the moment, fashion contributes around 10 per cent of Spencer’s’ revenues, electronic and electrical appliances 8 per cent and “home work and play” items 7 per cent. Goenka plans to raise it to 25 per cent, 12 per cent and 10 per cent respectively in two years’ time.

At the same time, Spencer’s has moved fast to stock its own private labels at the stores. These are on an average 15-20 per cent cheaper than other brands but carry substantially better profit margins. While most FMCG companies give margins of 12-15 per cent to retailers, margins on private labels can be up to 30 per cent. In apparel and appliances, the numbers can be even higher.

More margins
Private labels account for 80 per cent of Spencer’s’ fashion sales, 60 per cent in home care, 10-15 per cent in entertainment and 10 per cent in food. At the moment, about 15 per cent of Spencer’s’ overall revenue comes from these private labels. The company’s plan is to raise it to 25 per cent in two years’ time.

In private labels, Spencer’s has Smart Choice for processed food, home essentials, limited range of baby care and personal care products with over 100 sub-categories. There is Maroon for non-stick cookware, Livin Smart for modular furniture, including first-time goods like wine cellars and bar cases, Collage Studio for stationery and Great for electronic and electrical appliances. In apparel, there is Island Monks casual wear for men and women, Mark Nicolas for formal wear, Scorez for sportswear, Detailz for basics, Asankhya for ethnic and fusion wear, Puddles for infants and Little Devils for kids.

Rental renegotiations with mall owners, either in the form of reduction or revenue sharing, have led to a 30-40 per cent decline in rentals in tier II and III cities. In tier I and metropolitan cities, the correction is in the range of 15-20 per cent, and a further correction and its impact is likely to come by in the next few months, claims Goenka. “Ideally, 3-4 per cent of sales should go towards paying rents, but that situation will take years to happen in India,” he rues.

Rental restructuring became inevitable because the company in the heady months of rapid growth had empowered the local managers to seal rental deals and in their enthusiasm many did deals that were unsustainable. A mix of rental renegotiation, closures and relocations is expected to bring down the average cost of rentals by more than half to as close as Rs 70-75 a square feet in the last one year to build sustainable stores with variations across cities.

The organic, exotic and imported section sales contribute 5 per cent to revenues. To live up to the “Taste the World” slogan, it has tied up four exclusive international alliances — Beverly Hills Polo Club of the US for casual apparels, Lady Bird-Woolworths UK for kids wear, with Chad Valley Toys, and US-based Au Bon Pain fast food cafes. Currently, the sale of international brands is negligible, but it is expected to rise to Rs 20 crore in two years.

Goenka, of course, is hopeful of coming out of the red in less than a year. At a time when retailers have seen sales (per square foot) come down by almost a third, it is an ambitious claim.