Megamart

Megamart, Loot bet big on aspirant shoppers

Business model: Buy surplus stock of big brands at a hefty discount and share the gains with customers

Last month, discount retail chain Megamart opened its 175th store. That’s in keeping with the Arvind Retail firm’s promise of occupying 5,000 square feet of new space every week, or 2.6 million sq ft a year.

Megamart says it sells apparels from 200 national and international brands (the bigger format stores of 30,000-40,000 sq ft known as Big Megamart also sells homeware products, luggage etc) at a discount of 35-40 per cent.

Arvind Retail CEO Suresh J says Megamart scores over other “value retailers” in customer service as there is a service executive for every 300 sq ft of store space as against others where shoppers have to wait for the sales staff. The chain is looking at a turnover of Rs 500 crore for FY 2011 and around Rs 1,000 crore by FY 2013.

Megamart isn’t alone. Other discount retailers are also beefing up their operations in a bid to tap the growing number of aspirant shoppers.

The Loot, the Mumbai-based151-store discount chain, is planning to open 50 more stores in the next six months and is looking at a Rs 100 crore public issue to fund this growth.

“Funding is a limitation for entrepreneurs like us when we aim for higher growth. Though IPO is one of the ways to fund growth, we need to achieve some scale first,’’ says Jay Gupta, managing director, The Loot, which is looking at a turnover of Rs 130 crore in FY 2011, nearly 25 per cent higher than the last financial year.

The business model of these discount stores are as follows: The Loot, for example, buys merchandise at 60-70 per cent discount. The high discount is possible for two reasons: one, these are bulk purchases, and two, these are mostly surplus stock after the end of season sale. Loot earns gross margins of 10 per cent in its business.

Brand Factory, part of Kishore Biyani’s Future group, which gives 20-50 per cent discount, lends space to brands in its stores and earns a percentage margins on the business brands do. The chain is looking at a business of Rs 750 crore by the end of 2011 and plans to open five to six more stores.

Megamart takes merchandise on consignment basis from brands at a discount of 30 to 50 per cent, meaning if it cannot sell them, it will return the goods. Its gross margins are around 35 per cent.

“Some of them are managing their stores well and help us clear our stock. A lot of new things are happening in this segment,’’ says Ashesh Amin, president, apparel and retail at S Kumar’s Nationwide, which retails brands such Reid & Taylor.

Loot is focusing on the franchisee model to keep its overheads low. Out of its 150 stores, 110 are under franchisees and the chain is looking to open 25 more through this route. It is also experimenting with an online format over the last six months, but it has not got a good response so far, adds Gupta.

To ensure that the backend operations keep pace with its growth, the retailer has tied up with Tata Consultancy Services (TCS) for enterprise resource planning, and regional transporters for faster delivery of goods to its stores.

Despite the bullishness of discount retailers, some executives say there is a number of challenges before them.

“It is a tough business. Margins are low and you have to be dependent on brands. A lot of brands come up with their own discounts at least twice a year and shoppers get a variety of choices,’’ says Bipin Gurnani, president, Provogue, which runs discount stores under Promart in Ahmedabad and Indore.

For the same reasons, Provogue has decided to scale it down, Gurnani says. Originally, Promart wanted to open 20 stores in three years.

“Since you are dependent on how well large brands have done in their regular sales, you are in the dark on what is going to come,’’ Gurnani adds.

Adds Amin of S Kumar’s: “Once the main stores of brands picks up, there will be pressure on the discount retail chains. Besides customers are also realising that they are getting old merchandise,’’ he adds.

Though Vishnu Prasad, chief executive of Brand Factory, accepts that it is a challenge to get a consistent supply, he says no hypermarket or big retail chain can offer discounts throughout the year.

Discount retailers have sought to counter the problem by developing their own private labels. For instance, Megamart’s smaller stores mainly sell Arvind Retail’s brands such as Arrow, Wrangler and Excalibur. It has also launched Cherokee, an international value brand.

The Loot has four private brands, which account for 25 per cent of its sales.