We Need To Diversify Beyond Kiranas In India

You started your career as an investment banker but now are in retail?

I started in corporate finance and M&A. So, I did a lot of IPO work. Then, I transitioned to consumer product and retail. I covered many consumer product, retail and FMCG companies. After that I joined Siam Makro in Thailand and worked out of there for a year and a half before moving to India.

Why did they choose a different name - LOTS - for India rather than going with Makro, which is well known?

We wanted to come into India with a new identity, a new brand, while keeping the essence of the host business, which was wholesale. In Thailand, we are in wholesale, so that's why we called it LOTS Solutions, so that the focus was towards B2B customers - basically kirana as well as HORECA (hotel-restaurant-catering) customers. Additionally, when Makro was acquired by Thailand's CP group in 2013 - as you know SHV was the original shareholder - the Makro name was only for South East Asia and China.

So, is the Makro brand owned by different companies in different parts of the world?

That's correct. In Europe, Makro was sold to German cash and carry brand Metro. I think the only legacy Makro still owned by SHV is in South America.

Thailand's CP got into cash and carry in 2013. Before that, it was in consumer retail through the 7-Eleven stores. Are these completely different operations or do they have a common head in Thailand?

Makro Thailand was founded as a joint venture between CP group and SHV in 1988 and the first store opened in 1989. We (the CP group) divested the stake in 1997 during the Asian financial crisis but reacquired it in 2013. We do have a lot of areas where we work together. For example, there is some degree of joint buying. Sometimes, the buying and merchandise team of Makro and CP ALL work together to buy jointly in Thailand.

Why did you choose to start your Indian operations in the north? All three stores are in Delhi NCR.

Many ask this question. There is a large penetration of modern trade in south India. In some parts of south India, modern trade is 30-40 per cent versus the north where the penetration is still quite low. Also, across India, I think modern trade is about 9 per cent, while 91 per cent is general trade. We wanted to start in the North because modern trade penetration is lower here and that is an opportunity for us. But I understand the north market is not easy- it is a lot more price sensitive than the south.

You have opened three stores in one-and-a-half years compared to rivals who open a store, wait for it to stabilise and then open the next. How many stores are you targeting here in the next few years?

I am hoping that we will have around 15 stores in India in the next three years. We will be looking at opening at least another store in the fourth quarter of this year. We opened three stores in six to seven months from July 2018 when our first store opened. What we also want to focus on is: what are the things we need to improve. In the first quarter, what I was discussing with my staff was back to basics - you know, basic retail things such as stock availability, pricing.

You needed three stores to negotiate a good deal with suppliers?

If we look at it from the NCR perspective, I think some suppliers see us as a sizeable channel in NCR. So, that's why our focus as we continue to open more stores is to populate NCR and then move towards other large cities in the North.

Your current store sizes are?

Our Indian stores are 28,000-30,000 sq. feet.

How does this compare with Thailand?

In Thailand, we have multiple formats. The original stores were about one lakh sq. feet. Then we started downsizing - so today we have formats ranging from 10,000 sq. ft all the way up to one lakh sq. feet.

What is the catchment area of your Indian stores and how quickly do they break even? How many customers do you need and how many kirana stores do you need to break even?

As a whole, for each store, we need to register at least 45,000-50,000 customers. On an average, we should be looking at store break closer to the two-year mark. One issue a lot of retailers will be facing globally, and in India as well, is that with the new accounting standard, they will have to do rent equalisation. When you do rent equalisation, in your first two years of operation, your operating expenses increase. It's a problem for all retailers, both B2B and B2C.

What geographical area does each store serve and what distance do you need to maintain so that they do not cannibalise each other's markets?

We will be looking at anything greater than seven kilometres between stores.

There is a lot of experimentation in Indian retail and everyone is eyeing the kirana stores - be it Amazon, FMCG companies like HUL or Future group and Reliance. Will there be space for pure Cash and Carry in future or will it be a hybrid solution?

In Thailand, even though we don't have B2B and B2C restrictions, over 70 per cent of our customers are from the B2B segment and the rest are end users. For Makro, in Thailand, the 30-year journey has been B2B. For us, coming to India is not for eventually converting ourselves into a B2C business, because we are focused on B2B. When you ask about kiranas, one thing we need to focus on is diversifying our business customers. Kiranas could contribute may be 40-45 per cent but how do we grow other segments like Horeca or offices and institutions.

Why is the Horeca segment so attractive? Other cash-and-carry players also seem to focus very strongly on this segment.

The reason we like Horeca is that these customers are not as price sensitive as kiranas. Second, once you are able to capture a significant portion of their basket, there is higher stickiness. If you look at many Makro stores in Thailand, we have already evolved some classic formats into food service formats, which means we are focusing a little more on Horeca customers.

In order to win Horeca customers, it is very important that we understand what they want, not what we think they want. We do a lot of focus group discussions and our customer development team regularly meets Horeca customers to understand what they buy on a regular basis in terms of their disposable needs, in terms of their fruits and vegetable needs or their ultra fresh needs and also their dry food needs, which includes both FMCG and commodities. That's what we are doing. We know that in Delhi-NCR, a multi-cuisine restaurant of 90 PAX spends about Rs 50,000 a month on just disposable goods. Since there is a large penetration of multi-cuisine and medium-size restaurants here, there is a huge opportunity for us.

Coming to suppliers, how do you stock fresh fruits or vegetables which are perishable?

We have just opened our collection centre in Haryana. That means 20-25 per cent of fruits and vegetables in our store are sourced directly from our collection centre. We have put in a cooling chamber which extends the shelf life of produce that comes into the store. The trucks are temperature controlled. We still have to source the remaining part from agents or vendors, from major wholesale markets or other suppliers. It is important that we try to expand our buying through collection centres because it will allow us to have more control over sourcing.

Have you got your inventory management in perishables right? Can you predict how much you need to stock so that there is little wastage?

When we talk about fresh fruits and vegetables, meat and fish, in the first year, we have to be willing to have higher write offs. It is important to create the right perception of fresh/ultra fresh. If you immediately target lower provision or write offs, you might not have the kind of impact you require for your Horeca customers. Over a period of time, we will stabilise.

The CP group's portfolio in Thailand is very strong in foods. Does that translate to any advantage in India? How do you plan to differentiate yourselves from competitors like, say, Metro?

We have started working with some CP subsidiary companies so that some frozen products can be sourced directly from there. We want to expand that portfolio. What we also want to do differently is that Makro Thailand and 7-Eleven have large volume in procuring products from suppliers in Thailand. So we are looking at what kind of imported products can we look at to leverage the kind of volumes we have with these suppliers in Thailand. This comes back to the Horeca focus - when you go to any multi-cuisine or a pan-Asian restaurant, they are very specific about what kind of SKU they are using.

So, if they need a specific brand of soya sauce or if they want MSG (Ajinomoto), they are specific about what they need. We have done a lot of work with our Horeca customers and identified what products they buy that are imported. We have mapped those SKUs and will start importing. One example is the Healthy Boy soya sauce from Thailand. Many restaurants are currently using it. They buy it at a very hefty price, while we can import it at a much lower cost. These are things we can do to differentiate ourselves from competition.

@prosaicview