Are hypermarkets the way ahead for growth for retailers in India? Here are our two paise

Image: equitymaster.com

In 2008, a whole lot of retailers in India went on an expansion mode, leasing stores everywhere possible. From malls, shopping centres, high streets to your local lane. The economic slow down made most of them shut a few shops, sack some manpower and rethink their expansion plans. Many retail chains got wiped out altogether, unable to sustain their costs and massive debt burdens. A study by the experts shows in the graph to the left that growth in sales has no correlation to growth in the number of stores! (A leading pan India retailer) So what is the right expansion strategy to sustain sales over the counter and keep it growing to fund future expansion and keep the investors happy? Hypermarkets could be the answer to that question. Lets take a look at the case closely.

What is a hypermarket? Technically speaking, hypermarkets are large departmental stores that offer general merchandise, food, clothing, electronic appliances, jewelry, accessories and the toilet seat too. These are the big daddies of supermarkets and measure 30,000- 1, 00,000 sq ft. Hyper in hypermarket refers to size- in terms of store area as also the number of product options available. As a result of their large size, they provide visibility to a number of product categories at once. They are economically more viable for retailers because of economies of scale in operations. Larger spaces, less riff raff, more stuff to peddle, more revenue per manpower and square feet used et al. Get that, buddy?


I walk into the Big Bazaar a little way from home last Sunday with the wife to pick up a few things for the fridge. I end up with cosmetics, razors, some cologne, a silver necklace for someone my wife keeps talking about but I have never met! Get my point? People build hypermarkets so that when you walk in looking for something to put in your raided fridge, you might walk out with a new fridge itself!! The idea is to stock that large space, preferably at one level with as many things as possible to increase impulse buying and to facilitate 'I have been waiting to see that thing for myself and will go to the store someday' buying. You walk into a hypermarket and chances are, what you want and whats on your wishlist are on the same shelf. Little wonder then that More (Aditya Birla Group), Big Bazaar (Future Group) and Star Bazaar (Trent Group) are planning on expanding their hypermarket operations.


However, there are challenges. Growth in retailing today is more predominant in tier 2 and tier 3 cities. In cities like Surat, Aurangabad and Patna it is hard to find such large areas as required for hypermarkets. Quality manpower sourcing is even tougher. There is a need for people with customer service orientation. Also, proximity will always be an issue with the customer. Indians prefer to shop near their homes at a distance which is probably 10-15 minutes away from where they live. Then there are also customer- shopkeeper relationships that have been built over decades. The hypermarkets have to be ideally located to cater to particular localities. Also, sometimes the population in the catchment is quite diverse in nature. Retailing companies will have to customize promotions to specific catchment needs. Hypermarkets try to differentiate by selling goods at discounts. The long term effectiveness of discounts is unclear right now. The retailers might have to take a hit on profit margins if they want to sell goods at discounted prices. 


Keeping the guys with the moolah happy. But how does a retailer judge that his rig is heading the right way on the interstate (hehe)? Revenue per square foot is an ideal way to judge the efficiency of the company. Other important metrics to look at are sales per store along with same store sales growth. Sales might be increasing because of addition of stores or because of rise in sales of existing stores. We need to see whether a new addition is resulting in a considerable rise in sales or not. Also, a company needs to invest more capital when it expands. Thus, return on invested capital also is an important ratio to consider. 


The best way to keep the business happy is by careful expansion, low costs and very effective supply chain management and warehousing. Add a dash of quality manpower, the right stock and the retailer and its investors are a happy lot. The point we are trying to drive to the store is that in the Indian price sensitive scenario, hypermarkets will always have the edge. 
Inputs from equitymaster.com

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