Govind Shrikhande who recently took over as President and CEO of Shoppers Stop, is no newcomer to the business, having spent nine years with the retailer. Although he believes the core business model is well thought out, he’s planning some strategic changes in view of the intense competition and cannibalisation in the sector. In a conversation with Shobhana Subramanian, Shrikhande says that he will not hesitate to close down formats that don’t work. Excerpts:
Shoppers has been around for 18 years but its performance has been somewhat disappointing...
As a brand we are the most recognised and respected and in the department store space. People look at us as a brand to reckon with. In that sense, we have definitely arrived and anyone who wants to come into this market will first have to take a look at what Shoppers is doing. As for profitability, yes, there have been ups and downs. We recovered from the huge loss in 2001 but last year again we went down. This year, we should turn around. In the long term our finances should be steady. Our model seems to have become recession-proof.
But in this downturn, and it wasn’t even a full-fledged recession because GDP was still growing, sales have taken a hit. So how do you say the model is recession-proof?
Forty per cent of last year’s losses originated from some of the formats that we decided to close down, like the catalogue venture Argos. As for the top line or same-store sales, they are related to what’s happening around you, whether it’s cannibalisation, the increasing competition or the economy slowing down. But the model is recession-proof in the sense that even if same-store sales are down, we would be able to make money. That’s what we’ve done in the June 2009 quarter: On minus six per cent same-store sales, we made a profit of Rs 4 crore compared to a loss of Rs 15 crore last year.
Do you feel your model of stocking a bigger proportion of established brands (80 per cent) and a lower share of store labels is working?
Shoppers’ model is built on the premise that even in a downturn, the affluent don’t stop spending. Do you think this held true during the recent downturn?
We have been thinking about this. If you take a look at our target customers, the self-employed, employees in the IT-BPO space, banking industry professionals and exporters, three of these four sectors took a huge beating. The self-employed may not have been hurt as much. We have been wondering what happens to our model in such a situation when we stock so many brands. The surprising fact is that even if there is a drop in entry, whether it’s a multiplex issue or an IPL issue, high-ended categories like beauty have seen double digit growth. Categories like personal accessories, watches, ladies western wear or footwear too have clocked double digit growth. Clearly, customer needs are changing and we need to adapt to that. We realised the categories where we took the biggest hit are the same that have seen the highest discounting outside. We’re now aligning with some brands to make them available exclusively with us in a shop-in-shop kind of arrangement. So this way they don’t get into discounting and we don’t either. We are looking at some strategy change there specifically for men’s brands.
Why hasn’t Shopper’s scaled up or added much space all these years?
It’s true that other retailers have added more space and they have put in place a better strategy, doubling or trebling space across formats. If you look back, in 2001 Pantaloon’s revenues were Rs 150 crore and we were at Rs 204 crore. Today, Pantaloon is at about Rs 7,000 crore and we are doing just Rs 1,500 crore. In terms of space, we are 1.8 million sq ft; they are close to 11 million sq ft. We had a target of 2.5 million sq. ft but we are about 18 months behind schedule because some of the properties haven’t been completed by the developers. We’re hoping to grow from the current 27 stores to a 50-store chain.
Many of the stand-alone stores of the brands that Shoppers stocks have had sales recently with the result that your sales have been hit. How do you deal with this? Also shoppers are getting used to sales. Is that an issue?
I don’t think we have lost out because of sales being held at stand-alone stores. Our annual sale ended last week and that has gone well. Yes, we seem to be indulging customers too much, we’re pampering them. We have to stop at some point and try and do more full pricing. About 8-9 years ago we saw this phase and it’s happening again. We have controlled sales in our stores – three weeks in summer and three weeks in winter with a maximum of 40 days.
Where do you see same-store sales growth in the next few years and what kind of operating margins would that fetch you?
Same-store sales should range between 5 and 7 per cent in the next couple of years. As for operating profit margins, in the current year we’re looking at 6 per cent and over the long-run around 8-9 per cent, which is reasonable in India. That should give us a net margin of 4-5 per cent. Internationally, gross margins are far higher at 45 per cent compared with our margins of 33 per cent. That’s a 12 per cent difference. Also, abroad properties are often bought while rents are around 2-3 per cent of sales? In India, occupation costs are 8 or even 12 per cent.
What are your plans for Hypercity?
We have time till next June to exercise our option to take our stake from 19 per cent to 51 per cent, and although the rights issue hasn’t happened yet, it can still happen. We are hoping to raise Rs 300-350 crore or a slightly smaller amount. In the meantime we will fund the next five to six stores from internal accruals.
Is it worth hanging on to formats that are not profitable?
Crossword is turning around. It is a powerful brand and can make money, similar to that of a department store. We’re watching HomeStop till March-end. It’s doing better and is likely to turn around but we’ll wait before we decide to ramp up.
Is the slowdown over?
Very clearly things are on the mend and the slowdown appears to be over from the way customers are behaving. We’re expecting same-store sales to start picking up from October.