Bloomberg News

Big-Box India Stores Downsized as Profits Prove Elusive

June 16, 2014

Heavy Traffic Has Deterred Customers

Vehicles sit in traffic outside the Inorbit Mall in Mumbai. Poor infrastructure and heavy traffic in most Indian cities has meant large mall based stores haven't got as many customers as anticipated. Photographer: Bhaskar Paul/The India Today Group/Getty Images

Indian billionaire Chandru Raheja is finding that less is more.

The owner of Shoppers Stop Ltd. (SHOP) has been downsizing some of his grocery hypermarkets stores by more than half, shifting away from the big-box model he copied from the U.S. and Europe nine years ago. The reason: The strategy hasn’t been producing profits.

Raheja is one of several Indian retailers turning away from the large-scale format that first appeared in the country’s suburban malls about a decade ago and also has been losing steam in other parts of the world. Shoppers have proven reluctant to endure traffic and high gas prices to travel to the stores, especially with the country’s economic growth near the slowest pace in almost a decade.

“The great big box that we all originally started with is not really working,” said Mark Ashman, chief executive officer of Shoppers Stop’s HyperCity chain. “We’re interested in having a small, profitable business or a medium, profitable business, rather than a big business that’s bleeding a lot of money.”

Retailers opened hypermarkets expecting to draw customers from within a 10-kilometer (6-mile) radius because of the size, selection and novel shopping experience, said Ajay Sankhe, a retail specialist who’s worked in sourcing for Wal-Mart (WMT:US) Stores Inc.’s Indian venture and Reliance Retail. That didn’t happen.

Poor infrastructure and heavy traffic in most Indian cities have meant HyperCity stores didn’t get as many urban customers as anticipated, Ashman said in an interview in Mumbai where the company is based.

Traffic Woes

Customers haven’t been keen to drive for an hour or longer to get to the stores in newer suburban malls because most of their daily shopping needs can be met through small retailers and mom-and-pop stores close to their homes, the executive said.

Shoppers Stop has shrunk five of its 15 HyperCity stores larger than 80,000 square feet (7,500 square meters) by more than half and plans to reduce the size of all except one of its remaining outlets later this year. The new ones will range from 30,000 square feet to 50,000 square feet, Managing Director Govind Shrikhande said.

Aditya Birla Group’s More chain of supermarkets and hypermarkets has shut more than 40 of its stores and opted for smaller sizes for some outlets, according to an official, who asked not to be identified because of company policy.

“It’s too costly to operate these big stores, and it doesn’t make business sense anymore,” said Vivek Kaul, head of retail services at real-estate broker CBRE South Asia Pvt. “There is no incremental benefit in the sales per square foot.”

Shoppers Stop dropped 2.7 percent to 411 rupees, Future Retail Ltd. rose 0.6 percent to 123.40 rupees, at 12:29 p.m. in Mumbai. Reliance Retail’ parent Reliance Industries Ltd. (RIL) slid 1.8 percent, headed for the lowest level in a month, to 1,062 rupees. The benchmark BSE Sensex fell 0.5 percent.

Going Wholesale

Indian retailers’ shift in strategy mirrors developments in other emerging markets such as China, where Carrefour SA (CA) and Wal-Mart have experimented with smaller hypermarkets and mini supermarkets in downtown locations, said Matthew Crabbe, Asia Pacific research director at Mintel in Kuala Lumpur.

“Every retailer is moving to smaller stores,” Sameer Barde, director of corporate affairs at Tesco Plc’s (TSCO) Indian unit, said in an interview. “The Western big-box model is really not a very viable model at this point of time.”

Mukesh Ambani, India’s richest man, is also overhauling his big-box stores. He’s turning some of his largest shops into wholesale outlets that cater to bulk buyers, a format known as cash-and-carry that was popularized in the country by Wal-Mart and German rival Metro AG. (MEO) Typically, customers sign up for membership to shop there and other consumers can’t get in.

Real-Estate Prices

Rising real-estate costs, combined with interest rates that are the highest among the 10 largest Asian economies, make India a challenging market for retailers. India’s central bank lends to local banks at 8 percent, compared with 6 percent in China and 2.5 percent in South Korea, according to data compiled by Bloomberg.

“Real estate is ridiculously costly in India,” Tesco’s Barde said. “With fuel costs where they are, no one will drive out of town to buy groceries.”

Rental costs average 15 percent of sales for Indian retailers, compared with the 8 percent global average, according to consultant Technopak Advisors Pvt. Merchants in India also have a more limited availability of good locations than counterparts in China, the U.S. and Europe, Technopak says.

Bharti Enterprises Pvt., Aditya Birla Retail and HyperCity are still losing money despite operating for more than six years. HyperCity is likely to turn a profit in the year ending March 2016, Shoppers Stop’s Shrikhande said in May.

Losses

Food retailers’ accumulated losses crossed 130 billion rupees ($2.2 billion) in the fiscal year that ended in March, as companies added stores and adjusted business models, credit-rating company Crisil Ltd. said last month. The losses are likely to expand to 170 billion rupees in 2017, before contracting.

India’s retail landscape has evolved in the last 15 years as villagers moved into cities and the middle class swelled to more than 300 million people, according to reports by KPMG LLP and PricewaterhouseCoopers LLP. Established local chains such as Future Retail Ltd. (FRL), Shoppers Stop and Spencer’s Retail Ltd. expanded store sizes to encourage shoppers to spend more time in stores, to gain a larger chunk of India’s retail spending.

Experimentation

Corporate chains currently account for just 8 percent of India’s $490 billion retail market, according to Technopak. The rest of the retail trade is carried out by mom-and-pop shops, roadside vendors and other traders.

The share of corporate chains is likely to reach 24 percent of the market in 2023, amounting to $204 billion, the consultant projects. That’s the business that the chains are after.

“There’s been a lot of experimentation in the market as retailers try to figure out which model works in different parts of the country,” said Ashok Deenadayalu, a retail consultant who’s had stints at Reliance and the Indian units of Wal-Mart and Metro.

“People tried small stores, big stores and the giant ones. Not all of those experiments worked,” he said.

To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Dick Schumacher


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