In the past, modern retailers opened small grocery stores to achieve economies of scale. However, last year’s slowdown forced many of them to shut down hundreds such stores.
“Currently, our large-format to small-format stores ratio is 40:60. By March 2011 it will reverse to become to 60:40,” reportedly said Sanjiv Goenka, vice-chairman of Kolkata-based RPG Enterprises that owns Spencer’s Retail. According to a Spencer spokesperson, the company will open between 15-20 large stores with average size of about 35,000 sq. ft in the next one year. Aditya Birla Retail plans to open a dozen so-called hypermarkets with sizes ranging between 50,000 sq. ft and 70,000 sq ft.
One of the reasons to shift focus is because retail industry experts believe renting larger spaces in malls gives companies better negotiating power. Rents take up between 15% and 20% of a retailer’s revenue, compared with the global average of 10-15%. “The costs are lower as you go as an anchor tenant and your per sq. ft costs are also lower,” Goenka said. “You get a better deal on rents.”
Large stores can also generate additional incomes through sub-letting spaces for shop-in-shops and in-store advertising. That’s why Bharti Retail plans to open 10 large stores ranging between 35,000 sq. ft and 50,000 sq. ft in one year, although it will also open 60 smaller stores during the same period.
For Mumbai-based real estate-to-retail company K Raheja Corp., the focus will be on hypermarkets. Their HyperCity had to abandon its convenience store format in 2008 after opening a handful of smaller outlets in Jaipur. But HyperCity has been expanding and opened three outlets in Thane, Bangalore and Amritsar in the past four months. “Many retailers understand that opening of large stores is easier way to achieve scale,” says Kumar Rajagopalan, CEO of Retailers Association of India. “If you achieve volumes through five-six big box retail locations, then it is easy to expand with smaller formats.”
He said that Indian retailers will open at least 150 stores that are more than 5,000 sq. ft, which includes hypermarkets, specialty and department stores, which is a 50% jump from last year. “Most of the big boxes have been doing well for the modern retailers, whereas if you do not have scale, there is no profitability in small stores,” he said.
Meanwhile, the wine sales have not taken off in the retail stores yet as hoped. Retailers like Godrej owned Nature’s Basket and Spencer’s have developed a successful wine sales model perhaps due to Indian laws in different states not being conducive to a centralized and effective planning for wine sales. However, in years to come, retail wine sale is expected to pick up through these stores and the shop-in-shops concept is expected to be helpful to such wine sales.