The hypermarket chain Hypercity has 7 stores in India currently - three in and around Mumbai and 4 in other cities. Shoppers Stop had a 19% equity in the store which they have increased to 51%. Now they want to open eight new stores by next year and expect to triple their revenues to 1000 crores (from current 330 crores) by FY2012. The statement from the group says that this will lead the groups to break even in the FY2012. The detailed article is here:
http://retail-guru.com/shoppers-stop-eyes-around-rs-1000-crore-revenues-from-hypercity/
Let me bet....I do not see Hypercity breaking even in FY2012. Hypercity will of course have new and creative reasons in 2012. Unless something radical happens, I am sure that I will win my bet. Let me explain.
Expansion helps improve the profits if it leads to better utilisation of existing resources. If a retailer has 5 stores in a city, starting say 3 more could help. The supply chain infrastructure would be more or less the same. The same overheads (city office infrastructure and professionals, buying team, etc) that earlier took care of 5 shops would now take care of 8 shops. The only new cost in opening the 3 stores would be the cost of employees in the store. So, there is a good chance of increasing the net profit for the retailer.
For Hypercity, each location is a large store and has a baggage of huge overhead attached to it. Every individual Hypercity store would have to replicate all these expenses. There would be very little central overhead that would be shared. As mentioned in the article, 60% of the store's sales are foods. Since the food preference is regional in nature the merchandising and the buying team would have to be different for every region, or for that matter every store. Since every store would be in a different city, new supply chain infrastructure would have to be set up.
So, assuming that they follow the same policy, it is difficult to imagine Hypercity making profits with expansion.
McDonald's in India had a model where they limited themselves to around 30 stores in a few pockets for 4 years. They made all the stores profitable, mapped the necessary processes, created the support infrastructure and then had a full blast expansion. McDonald's was a proven global brand. They had most of the processes available and could have implemented the same in India. Their India people were smart and they instead expanded slowly.
At Rs. 330 crores from 7 stores, the current revenue comes to an average of Rs. 45 crores per store. In 2012, when the news release expects Hypercity to break even, the 8 new stores would only be one year old. It would be reasonable (or optimistic) to assume that each of these 7 new stores would also have a revenue of around Rs. 45 crores in 2012. This totals up to Rs. 360 crores. The existing 7 stores would have to get Rs. 640 crores and this comes to more than Rs. 90 crores per store. What we are talking of here is a 100% jump in revenue in just two years. Surprisingly the news release mentions that the strategy would be the same. I am not sure if it is wise to expect the same strategy to yield such amazing hyper growth for Hypercity.
Expansions help improve profits if the basic model is correct. Else the expansion could merely be postponement of the inevitable failure. To use expansion as a way out of losses is a tried and tested methodology and it has almost always led to failure. Somehow business professionals have a scant respect for history and they forget that history repeats itself.
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3 comments:
This is a very good analysis. You are right in saying expansion using existing resources help in profitability while expansion to new areas requiring new resources may lead to lower profitability than more. But this scenerio may change if the company instead of making greenfield investments for stores, acquires existing stores of competitors! Their focus on food and grocery is a good strategy for sustained business and turnover.
Since its about food, can we consider this :-
the average food inflation would be close to 10% for the next 2 years.
330 cr = 400 Cr in 2012
360 Cr = 435 Cr in 2012
total = 835 Cr.
therefore the existing 7 stores are required to add another 165 Cr. = 42% organic growth in two years = 20.5 % effective organic growth per year.
Considering only the revenue increase, is this the right way ?
Dear Sir,
That was very insightful.. had a great read. thanks.
But "However, its major earnings come from apparels and accessories due to higher margins." And most of its accessories are imported goods like watch, shades or cosmetics/perfumes. They might have quoted that the strategy will be same in coming years but they are slowly changing their Supply Chain Model. This we can discuss offline.
So not putting any numbers though but i do have some serious hopes from Hypercity that they will do well in coming years in terms of both growth and revenue.
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