Home >opinion >online-views >From local retailer to compact hypermarket

The trend among organized grocery/multi-category retailers of focusing on larger hypermarket formats has not gone unnoticed. The majority of recent store expansions have been in the larger formats. Smaller neighbourhood stores, in contrast, have seen a number of closures. During the last organized retail euphoria, the smaller neighbourhood format was considered a key success. However, the last 3-4 years have shown that neighbourhood retailers have not been making money. What went wrong?

Research in urban areas suggests customers are shopping at modern trade more for higher volume monthly purchase and using the neighbourhood kiranas for daily/top-up purchases. The footfalls that monthly basket purchases generate are not profitable enough, except for a hypermarket. We believe there are at least three reasons why there is a case for “compact hypermarkets"—covering, say, 4,000-6,000 sq. ft — in neighbourhood areas, which could provide a different experience from the surrounding wet market or kiranas that focus on food and grocery:

• The inability of a typical hypermarket to profitably penetrate every catchment. Both catchment prosperity and the availability of suitable footfall area (like a mall) will mean several localities in any major city will be underserved

• Inadequate supply and inconsistent quality of a holistic set of regular home- use goods—food, groceries, kitchen and household items—in smaller format stores. Research reveals that a customer is still unwilling to travel beyond 15-20 minutes for these commodities. Hence, proximity will always be a differentiator. Trips to hypermarkets linked to malls may not be sustainable for the “masses"

• By being the universal provider of basic home consumption goods, the retailer can realize higher gross margins by rationalizing focus on food for other categories such as basic apparel, kitchen and household items

However, to realize this value proposition, supermarkets need to focus on several success factors:

• Maintaining footfalls through a sustained customer acquisition and relationship programme in the catchment. So far, organized retailers have not made targeted efforts to acquire customers in every zone. Many retailers believed that “the store would market itself". Initially, given the novelty factor, this did hold true. However, in big retail, footfall is a result of regular engagement with the customer. This is especially so for the supermarket format. The neighbourhood organized retail model simply needs to develop a “customer connect" with the locals, and this keeps up footfalls. A systematic customer acquisition and relationship programme that is aligned to the retailer’s value proposition (whether it is based on price, merchandize, service or location) is, therefore, critical. Local organized pharmacy and fast food retailers are good emerging examples of these techniques.

• Customized promotions. Different stores (and catchments) will have different needs from a customer’s spending perspective. For example, low conversion may be a problem at one store, low bill value at another. While retailers have so far fine-tuned a “one size fits all" approach as far as promotions are concerned, they also need to look at customizing some promotions to specific catchment needs. Again, quick service food retailers are doing well on this front.

• Home delivery services, especially on off-peak working days. This will help neutralize the advantage of the local grocer and increase engagement with regular customers.

• Overhead/management costs. This has been a key area for supermarket chains, given that management costs have so far outweighed revenues. Retailers need to refocus on management structures for smaller formats, evaluate the need and value-add at each level, put in processes and systems that make the organization lean while maintaining speed and robustness of decision making, and look at concentrating operations within a city so that costs are better absorbed. This is easier said than done.

Finally, from an overall retail perspective, getting the regional and catchment flavour, and ensuring availability, is still work in progress. This is important in the key footfall-driving category of food. In fact, unavailability of regional stock-keeping units—cut down during the last slowdown—is a key reason why shoppers don’t keep coming back. It is also important to tailor product offerings to a catchment. For example, if the catchment has a wet market for vegetables and meat, the store should emphasize on complementary categories such as staples, processed food and so on.

So what does the future hold for the neighbourhood format? It seems retailers have decided to take it “one format at a time", given the intrinsic implementation complexities across formats and pragmatism on cash availability. This may mean a longer gestation for this format. But given the vastness of the retail potential and catchment depth in major cities, we believe the potential for the neighbourhood store continues to be strong. We could also see focused actors enter this segment if there are changes in retail Foreign Direct Investment or collaborations between organized companies and local grocers, which could usher in a new milestone for neighbourhood retailing.

Comment at views@livemint.com

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