Change is the buzz word at K Raheja group retail company HyperCity, one of the leading retail chains in the country. From the sprawling 1lac plus sq ft outlets to the recently launched 30,000 sq ft outlet in Bangalore, HyperCity is now pushing profitability by launching smaller format stores across neighbourhoods. This new move by the company will be replicated even in other markets in future. With a focus on tier 1 cities the plan is to take the store count to 22 in the next 3 years.
I recently did an interview with Mark Ashman, CEO, HyperCity Retail (India) Ltd., where he revealed that this year is all about pushing sales and the apparel business, investing in private labels and developing home and furniture segments.
You recently launched a 30,000 sq ft store in Bangalore. Tell us something about this new move.
Originally we were opening one lakh plus properties. Two years ago we shifted to launching 70,000 sq ft outlets. We did some more refining of the model and signed 50,000 sq ft boxes. But this is our first 30,000 sq ft box. So there are a couple of differences. The main difference is that there are two categories that are not represented in the 30,000 sq ft box – furniture, and electronic. The layout is by end use. In the new format apparel takes up about 4,000 sq ft. We changed the look of our fresh produce section from the heaper system to the international tray system. We now work on a narrower gauge fixture which allows us more space. So the choice of food (which is the biggest part of our business) in the 30,000 sq ft format is virtually the same as in our very big stores. We are hopeful that the new model will allow us to roll out more quickly, be more profitable and get us higher returns per sq ft. Costs will be much lower as we are taking less space.
The main reason for us to shift to this format is the space challenge. Also a hypermarket can’t pay the rentals that vanilla stores can pay. We are hopeful that those developers who want to see the kind of footfalls that a hypermarket brings as really important to their mall will be pleased that they can get the whole HyperCity experience on a 30,000 sq ft store. So that way it will be a win-win for both the developer and for us.
So what were some of the biggest challenges in this format?
The biggest challenge was to convince the internal team involved in opening 100000 sq ft centres that this could be HyperCity and could have the entire DNA that makes HyperCity great, in a smaller box. Having worked on this format for the last 15 months waiting for the developer to finish the mall, I am pleased with the impact. The reaction from customers and colleagues has been really positive. This moves HyperCity out in the front again.
Going ahead are you going to keep to this format and resize the existing stores?
We still want to have the big boxes where we have a bigger offer including furniture. In a city like Bangalore where we already have three stores, we believe there is space for 10 big boxes (50,000) and another 8-10 small boxes in the next 5-8 years. So we see them as complimentary. We have also been able to piggy back some of the backstage in the existing larger stores in the city so that the amount of retail space in the 30,000 sq ft store is of a much higher percentage than it would have previously been. So some of our backroom activities and stock storage are being done in the larger stores. It gives us the opportunity to piggyback some of the management across the larger store and the smaller store. Obviously putting another store in the same city means that there are no initial marketing costs and we get some economies of scale on warehousing. So we will basically stick to the 50s and 30s going forward.
We are also in the process of revaluated some of our stores. Our Malad, Mumbai store is a big box but it’s a very very profitable store. But we have had to convert our Amritsar store which was 1,40,000 store to a 60,000 sq ft. The store looks even better, smaller. We are looking at resizing 2-3 more stores by surrendering some of the space back to the developer on a mutually agreeable basis.
How’s business right now?
Trading during our fourth quarter was encouraging. Customer entry, conversion ratio up and basket size went up. Sales grew by 11 per cent and the margin is up by 30 basis points. Costs are controlled at +4% (ex rent). All things came together to deliver our seventh successive quarter of store level profitability. Store Q4 EBITDA Rs 107 lac/last year Rs 11 lac. FULL YEAR Store EBITDA TY Rs 425 lac LY (38) lac loss.
Food volumes returned in the quarter with sales up by 12 per cent and apparel sales grew by 37 per cent, increasing to 9.8 per cent of sales. So we remain very much on track with our growth strategy to company profitability. Now we are pushing for company level profitability.
How do you see the retail environment currently?
We did see some slowdown last year. One of the positive things of beings a hypermarket is that we are in so many segments. We did see a little bit of de-growth in volumes which the FMCG guys also saw. However, we saw incredibly good business on apparel as we are investing in that category. We also saw good business in home, sports, toys and stationery. Business in electronics especially the larger ticket items was challenging. All said and done, we have got so many segments that if the consumer is feeling the pinch in one particular segment we play on in the other segments. So it’s not a big pain point for us.
What is the strategy to profitability at HyperCity?
Our strategy is clear – choosing more profitable formats which are smaller. It’s also right sizing some of the real estate that we have and playing with the mix of goods.
We have seen very high double digit growth on apparel business. Our apparel business a year ago was about 7.5 per cent of our sales and our target by 2015 is to double that to 15 per cent of sales. At the end of Q3 we were at about 9.5 per cent of sales. So we are very much on track. The food business will always continue to grow is the consumption story.
Tell us something about your Private Label business. How is it growing?
Private label business is good. Overall private and exclusive label is 22 per cent of our business. Recently we have done some interesting launches in food – honey, jam, ghee and HyperCity noodles. It’s doing pretty well against Maggi. So we are continuing to develop our private label business in a cautious way. There is a trust factor with the HyperCity brand and everything that we have put out in the food domain has done well. So we will continue to push it further.
What kind of customer insights have you gained in the last couple of years in business?
We did some big research in March last year when we put groups of customers in a room with a facilitator. We told that them that management was going to listen in to their conversation. What they said was very interesting. “We love your stores, the range and hygiene. The service is ok. But you are a little bit expensive.” Since then we have been deliberating working on the costs factor. We don’t want to be seen as exclusive. We did a lot of work on that. We have bench marketed 70 SKUs which are in the customer’s basket to make sure we are the cheapest or the second cheapest in the market. We are doing the research to see whether the customer has noticed that. For us it is important not just to retain our customer base but it widen it.
When we started to bench mark our prices and got serious about it, we realised that there are other retailers who have been able to build a reputation on being the cheapest but in reality are not. So we trying to catch up and correct that assumption. We ran 4 page advertisements in newspapers where we had a preloaded shopping trolley with 25 per cent off. We also took another 10 per cent on FMCG food and groceries. The first one was highly successful. The last year was all about getting match fit but this year is all really about pushing volumes through business and it’s this bottom line that will improve profitability. It’s about being a little bit more aggressive and spending more money in getting our message out to customers.
Typically what is the investment in a HyperCity store and how long does it take to break even.
Let’s assume that you have put the store in the right place with the right rent. In a tier one city like Bangalore both our 1st and 2nd stores broke even at the store level in nine months. Stores in tier 2 cities take 18-22 months. These were the large box formats. So the focus is tier 1 cities. So a store at the right location at the right rent will definitely break even within 9 months. I am anticipating that the 30,000 and 50,000 sq ft boxes should break even quicker than 9 months. Hopefully within six months. The investment is around Rs 1200-1400 per sq ft. So a 50,000 sq ft box should take around Rs 7.5 cr.
What kind of expansion are you looking at? And what will be the investments?
We currently have 13 stores of various sizes. We have been quietly signing properties over the last two years. We are looking at opening around 22-24 stores in the next three years. In addition we have signed some green field sites. We will continue to sign and float clusters in Hyderabad, Bangalore and Mumbai. We will be getting into Noida with our first store by Q1 of next year. The second store of Noida will open around the same time.
We are very happy with the performance of our stores in Bangalore. But the city that actually surprised me was Bhopal. When we opened in Oct 2010 we were the first super market in the city. We have always had fantastic footfalls there and we have seen the business grow through the second and third year. That was surprising for a tier 2 market. For the first 15 months we were the only super market before Reliance came in to the picture, about 7 kms away from us. We saw our sales dip for two months and now we are back to the growth level that we had before. So the market has absorbed the second player coming in.
The focus really is on clustering in tier 1 cities. But we will be opening one store every year in tier 2 cities. Currently we are on site in three locations – , a 65,000 sq ft store in Vivacity Thane, Mumbai, a 47,000 sq ft store in Hyderabad and a 25,000 sq ft in Inorbit mall, Baroda.
In terms of investments we are looking at roughly Rs 24-26 crs for four stores this year. There are no other major investments for us. We run out of one warehouse in Mumbai.
Lastly what are your future plans?
This 12 months is all about how hard can we push sales and how much more volume can we punch. We have invested very heavily in IT and operations. So we get a better front end presentation than other competitors and as a result we are able to get better volumes. Our stores coped with Diwali, which is a busy trading period, very well. And that set us thinking that we could put we more volume. This year is also about pushing our apparel business, investing in private label and developing home and furniture. Furniture is one of the categories that we want to get after.
This Interview was done by Nivedita Jayaram Pawar and first appeared in Images Retail magazine – June 2013.