Reference no: EM133040539
Introduction
After a hectic day at the office on a cold December evening in 2019, Mr. Sreekanth, the merchandising head of Spicer Retail, was preparing for the trade negotiation that would happen the next day between Spicer Retail and Agritech on a national deal between the two companies. Sreekanth reviewed the data pertaining to Spicer Retail and Agritech for the last two years and wrote down the main points for discussion. He knew the negotiator from Agritech, Mr. Roy, from his Colgate Palmolive days when they used to handle different product groups of Colgate Palmolive for the same territory. Sreekanth knew Mr. Roy as a tough negotiator and wanted no stones unturned to create a winning deal for Spicer Retail. He asked his category manager to be prepared with margin figures, volume of business, and other relevant information that would be helpful at the negotiating table. He was anxiously waiting for the process to unfold as a fruitful one for him personally and for Spicer Retail as a company.
Spicer Retail
Spicer Retail started its operations in 2000 with a 50,000 sq. ft hypermarket at Hyderabad, a metropolitan city in the state of Andhra Pradesh, India. It was the first venture of APG Group in the organized retailing space of India. APG Group was a business conglomerate in India, headquartered at Kolkata, with more than USD 3.4 billion revenue with interests in multiple businesses spanning music and entertainment, tires, IT services, life sciences-biotechnology, and power production, transmission, and distribution.
Business Model
Spicer Retail operated 120 retail stores, including 37 hypermarkets in more than 35 cities in India. Spicer Retail operated two distinct retail formats: convenience stores and hypermarkets. Each of these store formats are briefly described in the following sections.
Convenience Stores
These are neighborhood stores catering to daily and weekly shopping needs of consumers. The stores ranged in area from 1,500 to 15,000 sq. ft. They stocked an assortment of fruits and vegetables, food, and non-food fast moving consumer goods (FMCG) products, staples, and frozen foods. Those stores with a floor area greater than 10,000 sq. ft also offered a selected range of baked cookies, frozen foods, personal and home care products, baby-care essentials, basic clothes, and small electrical equipment.
Hypermarkets
Spicer Retail hypermarkets were megastores that combined a supermarket and a department store. The stores ranged in area from 15,000 sq. ft to more than 50,000 sq. ft. These stores stocked a deep and wide assortment of food, fashion, home and personal care, general merchandise, electronics, staples, frozen foods, and specialty food sections, all under one roof.
|
Category
|
Gross margin (%)
|
|
Personal care
|
20-25
|
|
Home - lifestyle
|
30-35
|
|
Home - commodity
|
40-45
|
|
FMCG food
|
15-20
|
|
FMCG food - international
|
25-30
|
|
Groceries
|
15-20
|
|
Fruits and vegetables
|
7-13
|
|
Liquor and wine
|
25-30
|
The Spicer Retail revenue stream was predominantly from the sale of products through its retail outlets and accrued margins, but visibility was also another stream of revenue which was fast growing. Visibility income was generated by Spicer Retail through renting out specific assets inside the stores to its vendors (products and services companies). Vendors were willing to rent specific assets for their various needs such as better product placement, placing in-store promoters, testing new products with an existing customer base, and most importantly to acquire more shelf space and visibility for their products in Spicer Retail stores. The Spicer Retail gross margins for various categories as of December 2019 are given in Table 1.
Table 1. Gross Margin for Various Categories
In the oil category, it was a general trade practice to offer a margin percentage on landing price (mark-up) as the oil prices kept fluctuating on a daily basis. This practice gave flexibility to retailers to use the buffer between the mark-up price and maximum retail price (MRP) to offer promotional price discounts to attract customers. But Spicer Retail and Agritech had a previously agreed mark-down approach of pricing with a fixed MRP for a year and Agritech offered a specific percentage margin and year-long promotional support for Spicer Retail.
Positioning of Spicer Retail as a Differentiator
Spicer Retail had chosen to differentiate itself by establishing the company as the preferred shopping destination for young customers looking for a range of quality food products that allowed them to indulge in a global lifestyle, yet at affordable prices. From daily to weekly to specialty shopping, Spicer Retail fulfilled every need and provided maximum convenience to its customers.
Spicer Retail offered the widest assortment of food and lifestyle products with both brand and private labels. It had special sections within its hypermarkets to attract customers looking for a unique shopping experience. At Spicer Retail, the shopper could find specialty sections such as a live bakery, the patisserie, a nut counter, a dedicated wine and liquor section, and epicuisine. Spicer Retail stores had contemporary and international interiors, and the well-trained staff strived to make every customer feel at home while they shopped, with a welcoming and trusted attitude.
Asset Profile of Stores
Each Spicer Retail hypermarket (approximately 50,000 sq. ft of trading area) typically had an asset profile as detailed in Table 2.
Table 2. Asset Profile of a Spicer Retail Hypermarket
|
Category Bins A-type bays L-type bays G-type bays End caps
|
|
Personal care -
|
48
|
7
|
7
|
8
|
|
Home - lifestyle-
|
40
|
19
|
10
|
8
|
|
Home - commodity-
|
82
|
44
|
10
|
8
|
|
FMCG food-
|
140
|
-
|
20
|
20
|
|
FMCG food - international-
|
48
|
-
|
7
|
8
|
|
Groceries-
|
46
|
-
|
7
|
8
|
|
Fruits and vegetables116 -
|
-
|
-
|
10
|
|
Liquor and wine20
|
|
|
4
|
- Each A-type bay had seven shelves, which could accommodate SKUs.
- L-type bays were more reinforced than A-type and could hold more weight but also had seven shelves.
- G-type bays were heavy-duty racks which could hold bulk quantities. They were 8 ft tall with four shelves each.
- End caps were of similar size to an A-type bay, with one more additional shelf (eight shelves).
Each hypermarket also had approximately 40 visual hotspots identified where floor-stacks of products could be created for high visibility. The prominence of these floor stacks depends on their placement inside the store. Invariably, those floor-stack spots would be in the main aisle of the store where most customer traffic happened. They also had chillers, freezers, and point-of-sale (POS) machines where space could be partially or fully rented to vendors to display their products. A sample floor plan of a 35,000 sq. ft store is shown in Figure 1.