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Can RPG Retail Recover Lost Ground?
It was the first in India to spot the potential of organised retail. Now, RPG must scale up fast to stay in the race
PALLAVI ROY
It was the first business house to spot the potential of organised retail in India — as early as in 1996. That fruits,
vegetables and toothpaste could be sold successfully in clean, air-conditioned convenience was demonstrated by
RPG Retail, the company behind the successful FoodWorld chain. A joint venture (JV) between the Rs 8,500-crore
RPG Enterprises and the Hong Kong-based $5.5-billion Dairy Farm International (DFI), FoodWorld quickly scaled up
to over 90 stores, primarily in south India. Till June last year, when the two decided to go separate ways.
Even before the split, the JV seemed headed nowhere. Says Sanjiv Goenka, vice-chairman, RPG Enterprises, of
those times: “It was difficult from a business perspective. It was difficult from an emotional perspective. Having
said that, we had to move on.” And, right now, the plans to move on seem to be in top gear at the Rs 450-crore
RPG Retail as it tries to make up for lost time and opportunity. From about 0.6 million sq. ft currently, Goenka plans to
take his retail footprint to over 3.5 million sq. ft by March 2008, which should include over 50 hypermarkets from the
current four. All this does not include MusicWorld, RPG Retail’s national chain of music stores (see
‘MusicWorld: Playing On’). Goenka says an initial public offering is also in the offing in the next 12
months.
A year ago, however, things were different. Though RPG Retail had targeted 20 Giant stores (its hypermarkets)
nationally by 2007, it had managed only three by 2005. Meanwhile, other established retail players, the Kishore Biyani-
controlled Pantaloon, K. Raheja Group’s Shoppers’ Stop and the Tata’s Trent, were getting
active (see ‘The Hypermarket Space). Pantaloon, in fact, rolled out Big Bazaar at 21 locations in and around 10
cities in record-quick time.
RPG has also had the looming threat of the Wal-Marts and Carrefours, waiting for organised retail in India to open up
to FDI. And now, the Mukesh Ambani-promoted Reliance Retail is planning a foray with an investment of over $750
million. Goenka and his retail team must scale up fast to stay in the race.
To step back a little, between 2003 and 2005, not a single store was added under the JV. There were reports about
issues of control and poor understanding between Goenka and DFI’s chairman Simon Keswick. In RPG’s
scheme of things, retail was a priority, while DFI wanted control in the JV as this was the only instance in Asia where it
was a minority partner. It also wanted a stake in Giant, which (with MusicWorld) was outside the JV. So, the twain had
to part. Post split, RPG Retail was left with 49 of the 94 FoodWorld stores. The 30 Health & Glow stores, the other
chain in the JV that sells health and beauty products, became part of the DFI fold, as did the remaining FoodWorld
stores.
RPG now needed a rebranding exercise to differentiate itself from FoodWorld and to consolidate its retail identity.
Towards this end, it decided to brand its hypermarkets and food formats as ‘Spencer’s. It also decided to
back its hypermarket format and experience in food retail with the supermarket format, which would entail stocking
garments, brown goods and general merchandise.
Its retail strategy for Spencer’s encompasses four formats. The first is ‘Hyper’ — a
hypermarket that covers close to 50,000 sq. ft. Then, the 15,000-sq. ft ‘Super’, a supermarket or
convenience store, two of which have come up in Hyderabad and Faridabad; ‘Daily’, a food store selling
staples, processed foods, FMCGs, and chilled and frozen items covering about 4,000 sq. ft; and the 2,000-sq. ft
‘Fresh’, a round-the-corner store that sells only fruits and vegetables.
Spencer’s Fresh will dot neighbourhoods, closely followed by Daily. The Super will be placed at strategic
locations — property for one has already been firmed up at a Delhi Metro station. The number of Hypers will
depend on the city. Says Sumantra Banerjee, president and CEO, RPG Retail: “Along with competitive pricing,
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 Businessworld
quality will also be a key ingredient in our offerings.” Banerjee took over last year from Raghu Pillai who had
been closely involved with the group’s retail experiments since 1996.
Interestingly, RPG’s decision to go the ‘big-box’ way (as hypers are referred to in retail jargon)
was taken before the split. After all, stores that are over 50,000 sq. ft and stock 30,000 stock keeping units across
product categories are seen as the next big wave in Indian retail.
The key here is scale and ramping up fast. Says Goenka: “We now know how to play the game. We are better
prepared this time.” Critically, most of the early rollouts are being planned in the north and east where
Spencer’s has not had any presence. A Spencer’s Hyper has just started functioning in Sahibabad
(NCR). By September this year, it will hit Kolkata too where the group is headquartered. This will complete the pan-
India presence the group has lacked.
The difference in this model is the mix RPG is getting from its four formats. Its earlier focus was foods — fresh
and staples as well as processed foods. Typically, foods garner low margins (in the range of 10 per cent) on sales. But
the upshot is that fresh food stocks get ‘turned’, i.e., stocks are sold out about 25 times a month. On the
other hand, items like garments land higher margins at 30 per cent but get turned only once in 40-50 days on an
average.
In retail, the key is to achieve a balance between high margin-low stock turn units and low margin-high stock turn
ones. The idea was to reach the best combination of the categories that suited RPG’s revenue targets and
catered to the consumer. This is why close to 60 per cent of the merchandise at the hypermarkets will be food based.
Earlier, under FoodWorld, the company had distribution centres from where stocks were sent to various stores. This
called for additional investment in real estate of about 5,000 sq. ft close to the city. The way forward is to use the
backend of the hypermarkets as the distribution centre and reach stocks to the various stores. Says Goenka:
“When you have a backend, a logistics centre, a warehouse and a supply chain as we do for the Hypers, you
need to milk it for its worth through multiple front ends.” In effect, each Hyper will act as a ‘hub’
and the smaller format stores will be the ‘spokes’ that it will supply. This should save RPG anywhere
between 20 to 25 per cent of distribution costs per unit. However, a food-focused store cannot draw all consumers. And
this is where the supermarket comes in: between the Hyper offering all, and the foods store, and the fruits and
vegetables store.
Hypers will also have a fair amount of general merchandise like houseware and white goods. On an average, the
share of garments in merchandise on sales has gone up from 5 per cent earlier to 15 per cent. The idea is to also let
out floor space to concessionaires who can set up snacks counters — high footfall drivers. Music Express
stores will also find place here. But the percentage of foodstuff available will not be reduced; the idea is to target known
value items (like rice and flour) and staples. Says Banerjee: “These are usually large purchases and bring in
consumers. So, these will have to be aggressively priced.”
This is where RPG differs from India’s No. 1 retail chain, Pantaloon, which believes that the consumer’s
shopping basket will grow to include more non-food items. It has modeled its hypers accordingly: Big Bazaar’s
success has come from organised garment retail. Later, it added Food Bazaar in its stores. RPG, on the other hand,
has just put in place a garment merchandising team.
The broad aim of RPG’s strategy is to be a bit of everything to everyone. Says Asitava Sen, principal
consultant, PwC: “Worldwide, such a strategy has helped in capturing a larger share of consumer needs.”
While RPG Retail is yet to report net profits, it does have a positive EBITDA (earnings before interest, tax, depreciation
and amortisation) in single digits. The team can also take heart from its operating margins hovering around 20 per cent
— healthy by industry standards. But, as Pantaloon ventures into new formats like houseware and fashion, and
sets up malls, Spencer’s plan is to stay with the knitting. It is also moving into Big Bazaar territory in the north
and east for the first time. Biyani has the advantage of a depreciated business, a well-oiled supply chain and a
turnover of over Rs 1,200 crore.
Pantaloon is not the only competition. Every player with a sizeable retail presence is in the fray, as are some without
any like Reliance. Then, there are the foreign players. So, Goenka and his team have their work cut out. That’s
the easy part. Making sure things work to plan is imperative. After all, there are no second chances when you are
taking your second chance.
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