By Rasul Bailay
Mukesh Ambani’s Reliance Retail is converting some of its big hypermarkets into wholesale cash-and-carry stores, in an apparent sign of modern retail’s inability to effectively take on neighbourhood stores in India.
The Reliance Mart hypermarket in Bhopal’s Aashima Mall is currently under renovation and getting refitted to be reopened in February in a new avatar, as a cash-and-carry store.
This 44,000-sq-ft hypermarket is among Reliance’s big-box stores, including one in Ludhiana and another in Aurangabad, that are being converted into cash-and-carry formats.
The company has realised that in some locations, low-frills wholesale stores have better prospects of making money sooner than consumer-centric hypermarkets, which have wide margins but also are more expensive to operate, two people with knowledge of the development said on condition of anonymity
So, in order to convert the adversaries – the mom-and-pop stores in this case – into allies, Reliance is adopting a simple strategy: It is courting them.
In the cash-and-carry format, companies sell to bulk buyers, such as neighbourhood or kirana stores, who are their members. Reliance is setting up its wholesale stores in places where the concentration of kiranas is high as it is easier to make them customers than competing with them. The business also offers huge potential.
Industry experts estimate cash and carry in India to become a $22-billion (about Rs 1.4-lakh crore) annual opportunity by 2017, and the market leader in the segment is expected to corner $4 billion to $5 billion of this. The main rival for modern cash-andcarry stores in India is “wholesale retailers” – thousands of small retailers crowded into large markets, such as the Sadar Bazar in Delhi.
“Reliance Retail continues to evaluate its offerings and realign them in specific locations in order to establish sustainable relevance of the business with the consumer ecosystem,” a Reliance Retail spokesman said in an e-mailed reply to queries on the company’s plans on its cashand-carry business. In the traditional retail segment, the going hasn’t been smooth for organised players.
Over the past five years, Reliance Retail, Aditya Birla Retail, Spencer’s Retail and others shuttered hundreds of smaller convenience stores to focus on expanding big boxes as the smaller stores faced direct competition from kirana stores.
But hypermarkets, generally spread over 40,000 sqft to 60,000 sqft, come with their own set of challenges, such as high cost structure associated with a large number of staff, look and feel of the store as well as logistical cost that ultimately eat into overall profitability On the other hand, cash-and-carry business generates much higher volumes – as customers buy in bulk, albeit at low margins – with smaller operational cost. Cash-and-carry stores can be low-frills in terms of look and feel and ambience, and they save on logistical costs as companies and distributors would supply merchandizes directly to these stores.
Generally, Reliance Markets, as Reliance’s wholesale stores are called, allows only bulk buyers through memberships.
But the store at Bhopal’s Aashima Mall is also likely to sell to consumers apart from traditional kirana stores even after it is turned into a Reliance Market, according to Ashish Jain, marketing manager of the company that owns and runs the mall. “Since it is in a mall with a heavy consumer footfall, it will also cater to consumers,” he said.
Reliance, in fact, is undertaking an aggressive plan to expand its cashand-carry chain. It entered this business with a store in Ahmedabad in 2011 and the pilot was tested for the next one-and-a-half years before opening another one in Bangalore. In the past nine months, however, Reliance has opened about a dozen cashand-carry stores. Plans are also afoot to make an upcoming store at Mohali in Punjab, which was originally planned to be a Reliance Mart, into a wholesale store as well, one of the persons cited earlier said. In comparison, Germany-based Metro AG, a pure cash-and-carry player that has so far opened 17 stores in India since its entry into the country a decade ago.
An industry analyst said converting a hypermarket into the cash-and-carry format may not work in some cases. Hypermarkets and cash-and-carry stores are two entirely different formats with different demands and economies, Amitabh Mall, partner at Boston Consulting Group, said.
“Converting any hypermarkets into cash-and-carry has to negate the disadvantages of lower margin at the cash-and-carry with the high rentals (of the existing hypermarkets),” Mr Mall said. “That is the equation someone needs to solve. It could work in some cases and may not in others. So it’s a mixed answer.”
One of the anonymous persons cited above said Reliance has plans to convert many more hypermarkets into cash-and-carry in the coming months. However, Reliance denied this and said the conversion is limited and selective.
Further, as a conscious approach, locations and stores are identified as opportunities for the entire retail business and the precise format or offering is finalised after due consideration of the consumer demography,” the company spokesman said.
Source:The Economic Times
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