'HyperCity will be profitable by end of this fiscal, says Shoppers Stop MD

Govind Shrikhande, MD of the K. Raheja-owned retail company, Shoppers Stop , looked happy and relieved. His company this quarter has registered a decent volume growth after a tough period. Shrikhande is even more pleased as the company's hypermarket format, HyperCity, has hit breakeven. In a conversation with Ajita Shashidhar and Arpita Mukherjee, Shrikhande talks about how the company managed to make the hypermarket format profitable.

Q. Your hypermarket format, HyperCity has managed to break even though the turnaround took some time. What course corrections did you make?

A. Yes, it did take longer than expected. We should have achieved it last year. We are running behind by six quarters now. However, in the last two quarters we have been able to push through the agenda faster to make it happen. One of the three objectives we set for ourselves was right sizing of the stores. We have reduced almost 2 lakh sq.ft of space, which is helping us to get better productivity and lower costs.

Secondly, we have increased the share of fashion offerings at the stores. So last year, fashion was at 11 per cent and this year it's over 14 per cent. The big advantage of fashion is that the margin differentiation is large. So we got 70 basis point of margin growth this quarter.

Thirdly, we also worked on other costs, for instance, the distribution and logistics costs, which we brought it down by 70 basis point this quarter. Also, instead of all merchandise going to the distribution centre and then being sent to the stores, which added lot of costs and time and also impacted availability, a lot of vendors have started delivering directly at the stores. This has reduced costs, improved availability and increased the sales. Our operating expense has actually de-grown by 6 per cent this quarter. As a result you can see the whole swing of almost Rs 12.5 crore at company EBITDA level for this quarter. We are pretty confident that we should be able to maintain that swing and start working towards PAT profitability in the next financial year.

Q. What kind of cost control measures have been undertaken?

A. When you right-size the store, apart from a dip in rent, the power, people and stock costs also fall. Our per unit power consumption fell by 30 per cent by putting in place a host of monitoring mechanisms. We introduced new systems to monitor power on a day-to-day, hour-to-hour basis, which has helped. At a cumulative group level we have reduced our unit consumption of power by 45 per cent over the last five years.

Q. What's the size of a HyperCity store now?

A. Currently, we are targeting all new stores to be around 30,000 sq.ft. to 40,000 sq.ft. Our original numbers were more than 1 lakh sq.ft. The average has already fallen to about 60,000 sq.ft. in the last few years.

Q. Don't you feel the need for more space?

A. The whole model originally was meant to create a big box so that customers can come and shop for everything from that big box. Our realisation is that our big box is not sitting next to the customer, next to the customer there is a kirana store or the  roadside vegetable and fruit vendor. So, the customers need to come to the big box once a month or once a fortnight. Their weekly or daily shopping is happening at the roadside or with the kirana. Therefore, the assortment that I am trying to keep will not justify the kind of stock or the space. So, by crunching the space, I am only stocking things that my customer will shop  every fortnight.       

Q. Have you stopped selling certain categories of products?

A. We have exited certain categories such as consumer durables, which saved almost 20,000 sq.ft. of space. We have also exited furniture, which used to take 15,000 sq.ft. Now 65 per cent of the space comprises food, fashion 15 per cent and general merchandise 20 per cent.

Q. What are the new categories that you have added in food?

A. We have not really added many categories, but there is a whole movement towards on-the-go food, where you will see the assortment slightly increasing. We are selling cut and packed vegetables. We have also experimented with foods which are wrapped, so that the freshness remains longer.    

Q. How many HyperCity stores do you currently have?

A. We have 15 stores and we plan to add two stores every year. By end of this year we will add one more store. The current objective is to be PAT positive this year. Once we hit that we will start ramping up faster.

Q. E-tailing companies have gone overboard with their media spends this festival season and they did succeed in generating a consumer base. Did it increase traffic to your online site?

A. Not really. We were not offering the kind of discounts they did online.

Q. Most the e-trailers have adopted a deep discounting strategy. They are able to do so as they are being backed by investors. Do you think they can sustain this model for long?

A. At some point, this billions of dollars investment these retailers are getting will stop because the investors and promoters will soon realise that they better build a long-term business model, rather than destroy wealth. So my guess is this kind of disruptive practice will continue for maximum another three or four quarters. People will realise that physical store is not going anywhere.

arpita.mukherjee@intoday.com

@arpitamukherjee