With 20 lifestyle stores and 33 Crossword outlets targeting the middle and upper middle class, the company has now entered the value retailing business with 'Hypercity'. And guess what? The store has achieved footfalls of one million in just 90 days.

B S Nagesh, managing director and CEO, Shoppers' Stop talks to Priya Kansara about the company's expansion plans and challenges in maintaining its growth numbers. "Retailing is a simple business but what is complicated is to keep it simple," he quips.

The company plans to maintain its sales and profit growth of about 30 per cent and 45 per cent respectively. At Rs 527.5, its stock price has declined by 4.2 per cent in last six months and trades at 47x and 37x for FY07E and FY08E respectively.

At Rs 527.5, its stock price has declined by 4.2 per cent in last six months and trades at 47x and 37x for FY07E and FY08E respectively.

What are your store expansion plans?

We have signed up 30 more stores for Shoppers' Stop Department Store with an area of 2.7 million square feet, which will take out total number of stores to 49, spread across 3.6 million square feet.

For the Hypercity, an independent company, in addition to a store of 1.2 lakh square feet, we have signed up 20 stores to cover an area 2.6 odd million square feet.

So in all we will cover approximately 6.2 million square feet. This will include about 9.8 lakh square feet of speciality retailing comparing food and beverages (F&B), Crossword, Mother Care and MAC among others.

In addition to Tier-1 and Tier-2 cities where the company has a presence, we have also identified 23-24 cities for expansion. The rollout programme for all our stores would be complete in the next three years.

What are the challenges you are facing?

The key challenge that the company faces is its ability to manage growth. We must ensure that we do not trip on our own shoe laces. Another issue is that most property developers did not correctly anticipate the time required to deliver a mall and have fallen behind schedule.

How is your loyalty scheme performing and can you sustain customer conversion rates?

Our First Citizen membership has reached 6,44,500 in Q1 FY07, which is a jump of over 33 per cent and now contributes 63 per cent to sales. We expect the First Citizen's membership to cross a million in the next two years. Contribution from these members should be maintained at around 60 per cent. 

We hope to acquire new customers by strengthening the Shoppers' Stop brand, improving their shopping experience and offering a diverse product basket. Our current conversion ratio is 27 per cent and we do not expect it to fall.

What is your outlook on sales and profitability per square feet?

The growth in sales will be in line with the growth in space with the current average turnover of Rs 7,500 per sq ft expected to continue over the next five years. The current operating profit rate of 7.5 per cent will be increased to 8 per cent over the next few years.

Since all your properties are on lease, do you envisage escalation in rentals as an issue?

The Shoppers' Stop Department Store and the hypermarkets come with a minimum lease of 24 years with a lock-in period of three to five years depending on the landlord and the deed. After every three years, there is an escalation cost which ranges between 9-12 per cent depending on the lease.

In Q1 FY07, your employee costs and selling and distribution expenses shot up by 47 per cent and 83 per cent respectively. Do you see sustained pressure on margins because of this?

Employee remuneration has been revised upwards to match market standards. To be more precise, our increments have been 25 to 40 per cent for our top 100 employees, while at a company level it has been approximately 18 per cent.

Further, in order to pre-empt attrition, which is very high in retail at the front end employee level, we have offered incentives which are more attractive for our employees. All this has resulted in employee costs rising in absolute terms.

In our case, the attrition rate on the front end which is at the customer care associate level is 40 to 50 per cent and at the management level between 8-10 per cent.

We have also consciously stepped up our advertising expenditure in the current fiscal. This has given us substantial benefits by way of footfalls, conversions, cash memo size and hence overall sales and profit growth.

Our 49 operational stores would have approximately 9,000 employees from the current 2,500.  We expect pressure on employee costs in the short term.

However, in the long term, as the industry matures, employee costs should be on a more normal growth curve in keeping with industry salary increases and economic improvements. As a percentage to sales we do not expect employee costs to show a sharp rise.

Non-apparels have grown faster than the apparels in the past few quarters. Do you see this trend continuing?

In Q1 FY07, the share of non-apparels like footwear, leather bags and accessories predominantly used by women went up to 40 per cent from 38 per cent in the previous year.

Western fashion habits of carrying the best of bags and wearing the best footwear are being adopted by women here. Non-apparel share will remain at the same level or might even go up.

Do you see contribution from private labels increasing over time?

In Q1 FY07, sales through private labels contributed 21 per cent. We believe in providing customers with a wide choice of national and international brands and therefore the contribution of private labels will not exceed 25 per cent. This is a strategic decision that we have taken and is in keeping with our product offering plan for our customers.

What is your view on Reliance's entry into retail?

Even in the $3 trillion American retail market the largest player holds less than 10 per cent. That is the kind of fragmented market retail is even after consolidation. To me, a new entrant, who is talking of expanding in a big way will create opportunities in the first 5 to 10 years.

Thus the market will expand and we believe that price competition, if at all, will be in fresh fruits, vegetables, groceries and staples area.