Shoppers Stop plans expansion in tier II and III cities

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Retail major Shoppers Stop is going all out to increase their presence across different cities. Govind Shrikhande, the President and CEO of the company says they have witnessed strong footfall and volume growth potential across tier II and tier III cities and are looking at further expansion. "Going ahead, we see ourselves entering in cities like Aurangabad, Mysore, Vijayawada, Ludhiana, Cochin, Vizag and Mangalore. So, you will see us entering another eight-nine cities in the next three-three-and-a-half year's time," he said.

Below is a verbatim transcript of his interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: Off-late you have been talking how Shoppers Stop has been on investment mode. Now, we understand that you are looking more at the tier II and tier III space. What kind of opportunity you see over there and what is the game plan for the company?

A: When we looked at the market, there are more than 35 cities in India with more than a million population. All these cities generally aspire and look forward to shopping in Mumbai, Delhi and these kinds of cities. If you take the shopping environment right next to them, we believe that the overall potential that exists in these cities can be exploited much better.

Our experience in the last few years in opening stores in cities like Lucknow, Amritsar is completely vindicating our stand that these cities are openly waiting with open arms, doors and wallets to come and shop in our kind of format. Going ahead, we see ourselves entering in cities like Aurangabad, Mysore, Vijayawada, Ludhiana, Cochin, Vizag and Mangalore. So, you will see us entering another eight-nine cities in the next three-three-and-a-half year's time.

Q: Nothing immediately in this year?

A: This year we have already entered Amritsar and Bhopal. Amritsar we entered in March, Bhopal we entered last month and we are entering Aurangabad in October. Between Vijayawada and Mysore we should see between December to February.

Q: It's a very interesting trend you are pointing to. Can you extrapolate a little more and give us some colour and range in this. If you were to compare the malls you have in your tier II and III cities and the ones you have in the metros, what is the pace of growth you are seeing in both of them? What would be the margins, they would be much better in your tier II and III city malls?

A: Although the emergence and growth of tier II and III is going to be at a much faster pace, the total number of cities and the depth of the market would not be as large. For example, in Mumbai or Delhi currently we have between eight and seven that is 15 stores. We still have a potential to adding another ten stores. The potential in these two markets is almost Rs 500-800 crore each. In a small city like Lucknow, the total potential for this kind of category would be about Rs 80 crore.

One has to also accept the differential that is, what is the spending power in a big city versus a small city. Yes, there are also differentials in terms of how the smaller city behaves in terms of product group. For example, apparel buy in smaller cities is much higher than a Mumbai or Delhi where accessory buy is much higher. If you look at corporate wear, Bhopal doesn't have many corporates, Lucknow doesn't have too many corporates. So casual wear is much larger there than formal wear.

Same thing you can see also for working women. Working women proportion in Mumbai, Delhi and Bangalore is much higher than any of the small cities. You will find different nuance changes in each of these cities but aspirations still remains to be fashionable. They want to send more money on clothing and accessories as such and that is a growth that we are trying to tap.

Q: For the overall kind of increase in footfalls and expenditure per footfall that you are seeing, can you give us some numbers? Your first quarter numbers were absolutely fascinating. If you can tell us what is the kind of growth you are seeing in footfalls and in expense per footfall across all cities?

A: This is a great thing that's happening in the last two quarters. Apart from the footfall growth, which is at 7-10%, we are seeing good volume growth. Volume growth in the fourth quarter last year was about 18%. We are seeing a similar trend in the first quarter. I am still betting that second and third quarter we should see a similar trend as well which means we should be able to really hit 25% plus overall growth definitely for the whole year. With the addition of stores that is happening, we see this continuing for the next three years or so.

Q: Along with this kind of consumption growth that you are seeing, we are seeing a rise in real estate price as well. Will you be able to maintain margins or will margins start looking to get squeezed because your fixed costs are increasing because of the real estate component?

A: The good news right now is the demand growth is outstripping the cost growth. You should definitely see profitability improving without doubt. Yes, there is some amount of hardening of rentals in specific cities but overall the trend is still soft.