“The recession taught us a new lesson of growth versus profitability”

In the third part of his exclusive interview with Moneylife, Govind Shrikhande, president and CEO, Shopper’s Stop, explains to Pallabika Ganguly about how his company handles staffing issues and his strategy for category management

ML: Are prices of real estate headed down?
GS:
The new properties which we have acquired are 40%-50% lower than my earlier (rental) rates of existing properties. For example, my Ahmedabad property was acquired eight years back. The store was supposed to have been operational three years ago, but due to litigation, the inauguration got delayed. As it got delayed, we took the advantage of the downturn and renegotiated the rent and reduced it by 30%.

Over the past five months, we have signed up five-six properties and we have been able to renegotiate the rent of our existing five-six properties. Property prices have definitely gone down during the past year.

We were happy that the recession taught us a new lesson of growth versus cost versus profitability. We learnt that we should take steps cautiously and should not expand rapidly because everybody seems to realise that this model has to be a win-win model for everyone concerned. Whether it is the landlord, retailer or the brand-owner, everyone has to work together to make it a successful model.

ML: During the downturn, were there any redundancies in Shopper’s Stop, as you have spoken about reduction in employee cost?
GS:
No, we did not tell any employee to go home. We only right-sized our manpower as per our requirements. For example, in a store of 50,000 sq ft, I saw that there were 142 employees—but after analysing the output of each employee, we found that the same store could be managed by just 122 people. So instead of recruiting 142 employees, we are now recruiting only 122 people. Naturally, if sales and entries grow, we can always recruit more. In our existing stores, there is attrition at the front end which ranges between 2%-3% every month. For example, if in September, I know that I would need only 122 employees instead of the current 142, I would get the right staff size by January by not recruiting any more. Last year, we were replacing attrition. But this year, we are using the same staff strength unless the store reaches the right size. However, as the store grows, we will continue to employ more people. 

ML: How are you planning to address the problems at the front end?
GS:
At the front end, we have refocused on three big areas currently. One of the biggest focus areas related to customers is availability of new merchandise which we are addressing through new brand launches like ZooZoos(the characters from a recent Vodafone advertising campaign), German jeans wear and lifestyle brands like Mustang or Tommy Hilfiger within the store. New brand launches keep customers excited and we are focusing on the availability of merchandise whether it is size, colour, style or fit.

The second element is making my associates knowledgeable about the brands, making then capable to handle customers, able to understand his/her needs and then accordingly sell to them the correct merchandise. If last year, we were spending 500 man-hours on training on a monthly basis, this year from January onwards we have doubled the training hours. This is the key thing to do in any tough situation because if you have fewer customers walking into the store, the only thing left in your hands is how to increase the number of buyers and how to increase sales per buyer. Over the past six months, our average cash memo size has gone up by 10%. This means either the customer is buying more or he is buying a higher priced product which only happens in a knowledgeable atmosphere and with better guidance of right brand, merchandise and style.

Finally, we have also worked on understanding the customer basket from the marketing side, identifying who is the right customer and in which catchments, and how to focus on identifying the right merchandise mix for those particular catchments.

ML: Why do you plan to focus on the non-apparel side of your business
GS:
For the past seven years, we have been concentrating on non-apparel revenues. The share of non-apparel earnings has gone up to 42% from 25% and now our key focus is to differentiate our brands and format from others. We realised that not many players are focusing on non-apparel categories like beauty, personal accessories, perfumes, leather (including footwear, hand bags), jewellery and home solutions. Our store in Malad, Mumbai, has a whole ground floor dedicated to non-apparels comprising 10 cosmetic brands, eight jewellery brands and many perfume and other personal accessory brands. Domination of this category helps us to differentiate ourselves from others. You even conquer the consumer’s mind because if he wants to buy any non–apparel brand, he will first remember Shopper’s Stop which has a wide range of brands. We should be able to earn 45% of our revenue from this category by next financial year (FY11). We also observed that the customer’s lifestyle is also moving more towards non-apparel products. For example, if a customer was using only one kind of watch everywhere (in the past), now he wants a different watch for parties, one for wearing to the office and another one to wear as a fashion accessory.

ML: How many new brands do you plan to launch this financial year?
GS:
We want to launch at least one or two brands every month across various categories. Ideally 20-25 brand launches every financial year is a good number. When I mention launch, it does not mean only an exclusive launch with us, it will be there in the market but at very few places. This month we are exclusively launching a range from Playboy. We recently launched ZooZoo T-shirts and are reporting good sales over the past two weeks. Earlier, we launched eight designs each in men’s and women’s categories but now we are thinking of launching eight designs every two months.

ML: Are you planning to take your private labels to other retail formats?
GS:
We have no plans to take our private labels to other formats. By definition, private labels or exclusive labels have to be within your format. If you are taking them outside, you are trying to convert them into labels or brands meant for distribution.

ML: What is your strategy for marketing fashion merchandise? 
GS:
Fashion is driven by a cycle as well as by some ‘facts’. For example, I think, ZooZoo is a ‘fact’ which might become permanent. Merchandise based on films is also a great option. When we partnered with the film Om Shanti Om, we marketed film merchandise and earned Rs5 crore. That was the most successful film merchandise sale achieved by any retailer. Around two months back, we partnered with Love Aaj Kal which was also successful. We will continue to partner with two or three films in a year. We are also launching a new segment called IIFA Blink, through which we plan to bring in fashion merchandise based on films at regular intervals.

Earlier, we had tried to sell designer merchandise but it did not work very well. We had a number of designers like Rohit Bal and Ritu Kumar retailing at our store. Neither the designers were connecting to customers nor were customers wanting to shop at a large departmental store for designer merchandise. They (the customers) wanted a personalised store experience for such merchandise.

Film merchandise and other fashion merchandise like Mustang which launches almost 8-10 ranges every year have a great potential. Tommy Hilfiger will launch four-six ranges of new designs every year. We are now working with a number of brands which are much more ‘fashion forward’ and that is changing the fashion quotient within the store across all categories.
 

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'We have rationalised costs and fine-tuned our depreciation model'

Shopper’s Stop reported a significantly higher profit during the second quarter. Govind Shrikhande, president & CEO, explains to Pallabika Ganguly how he did it.

Pallabika Ganguly (ML): Shopper's Stop reported healthy numbers for the second quarter. Do you think the good show will continue in the next quarter as well?
Govind Shrikhande (GS): In the retail sector, the third quarter is always the best quarter because of the festivals, new-year celebrations and commencement of the marriage season which lasts till May-June next year. Last year, sales were affected following the terror attack on Mumbai. The slowdown continued till March this year. But the business environment has changed since then and I don’t see any problem in repeating our second-quarter performance. There are three key reasons for the improvement: first, the overall climate is definitely improving, as we can see from the revival across several industries, and consumer confidence is high; second, the European and US economies are showing signs of recovery; and third, Shopper’s Stop is a good brand and we have upgraded our merchandise and also launched many new brands. With an increasing, loyal customer base of around 14 lakh, I feel we will be able to do well in the coming quarters.

ML: How have you managed to cut operating expenses?
GS:
During the first and second quarters, we were able to cut our operating costs by around 600 basis points. We achieved this through multiple measures. We reduced our employment cost by 15% to 18%, including a 15% salary cut of top management. We reduced our electricity consumption by 14%. We are also shifting to Tata Power from Reliance Infrastructure, which would help up to reduce our electricity cost. We have also cut down on advertising. Last year, we had to spend around Rs14 crore on our logo change, but this year, this cost was not there. Besides, we have also cut down our usage of office space by 15%.

ML: During the second quarter, Shopper’s Stop reported operating margins (OPM) of 7%, while there are several retailers across the country operating on a very thin margin. Will it improve?
GS:
Instead of OPM, we prefer to use EBITDA (earnings before interest, taxes, depreciation, and amortization) to measure performance. Over the next 18 months, we should be able to achieve an EBITDA of 8.5%. When we talk about the margins of retailers across the country, we need to look at three relatively big segments: the hypermarkets & supermarkets where OPMs are below 20%, departmental stores where OPMs are 30%-35% and the electronics segment where OPMs are less than 10%.

ML: During the second quarter, your net profit rose 200% to Rs12.1 crore. What are the factors responsible for this growth?
GS:
We worked on our depreciation policy, which gave us a swing of 500 basis points, while saving on operating costs and increasing cash margins. Earlier, we used to renovate our stores every three years. But after some research and analysis, we found that there is no need to renovate every store every three years—we can do it over a period of five to seven years. With an EBITDA of less than 5%, depreciation of 4% and interest cost of 1.5%, our overall net profit was impacted. Our auditors and board members then reviewed our depreciation policy and found that we were actually over-depreciating our entire assets. We realised that the competition was using a completely different method of depreciation and our depreciation rates were nearly two-and-a-half times higher. So, we revisited the whole policy and decided to apply depreciation rates as per the category. For example, computer and IT infrastructure gets outdated over a three-to-four-year period, so we adjusted our depreciation rate accordingly. We increased the depreciation period to seven years for furniture and to 12 years for ceiling & flooring. Earlier, we used to bundle everything into a three-to-five-year depreciation cycle.  

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China faces massive steel oversupply; global prices likely to be affected

China’s steel trade body fears a rapidly worsening situation in the December quarter and early 2010

While Indian steel stocks are rallying, China Iron and Steel Association (CISA) has warned that oversupply is the major problem that the Chinese steel sector would need to confront. The trade body expects the situation to worsen in the fourth quarter and in early 2010. Steel is a globally-traded commodity and overcapacity in China is bound to lead to lower global prices and pressure on Indian steel companies.

According to CISA statistics, the steel inventories of 26 large and medium-sized cities totalled 11.13 million tonnes (MT) at September 2009, up 5.3MT or 90.9% from the beginning of this year. Further, the 68 large- and medium-sized steel enterprises’ steel and billet steel inventories totalled 11.55MT at September’s closing, up 1.44MT or 14.26% from the beginning of the year. Of the 70 large- and medium-sized steel enterprises, 10 suffered losses in the first nine months as compared to seven in the same period last year. China’s crude steel output was 420.40MT, up 7.5% year-on-year over the first nine months of this year, up 29.37MT. China’s current steel capacity is around 600MT per year, with around another 58MT per year under construction.

Meanwhile, the entire year’s output is estimated at 550MT, up 50MT or 10% from 2008. In the first nine months of this year China imported 1.37MT of crude steel as compared with the 39.47MT of net exports in the same period last year.

As total net crude steel exports reached 47.63MT for the entire 2008, some 47MT will be shifted from the international market to the domestic market. China’s apparent steel demand rose 20% year-on-year in the first nine months, to 421.8MT, mainly driven by the government’s expansion of fixed asset investment, and the growth is predicted to sustain into the fourth quarter and early next year.

China has also imported 1.005MT of stainless steel in the first nine months, up by 4.3% year-on-year and exported 4,76,800 tonnes, down by 45.5% year-on-year. During January 2009 to September 2009 the Chinese stainless steel output was 6.569MT, up by 37.5% year-on-year.

As per reports, the output growth of crude steel and the change in imports and exports would bring the supply of crude steel in the Chinese market at 20% above last year’s figures. In October 2009 alone, Chinese crude steel production growth has sharply grown by 42% year-on-year to 51.75MT.

-Swapnil Suvarna [email protected]
 

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