EXPAND. ATTRACT. REPEAT.
As you enter the new Keells store, the first thing on sight is the fresh food section, under a beam of fluorescent yellow, sitting upon a long queue of wood-paneled crates. Aside it, an elongated stretch of frozen foods, fuming with vapor, lines the wall. Above it, with its high ceilings and the huge plexiglass panels affront, light and space floods through the floor.
The symbolism of the makeover is deliberate.
In mid-last year, Jaykay Marketing Services, the retail arm of John Keells Holdings, hired a UK and Australia-based brand consultancy firm, Whippet, for a complete overhaul of its brand and store design. The agency has a history of revamping prominent international retail brands like Tesco and Coles. Their singular task was to propel a dramatic shift in brand identity and the local shopper experience for Keells.
Among the major modifications, the more-than-two-decade-old brand name was changed from ‘Keells Super’ to simply ‘Keells’, while the monotone cherry red theme was swapped for a leafy green. Apart from the external décor, a hot stove with a kitchen for cooked food and a juice bar were included as permanent fixtures in the layout to induce consumers to linger a little longer inside the store.
“The revamped concept incurred an additional investment of 10-15% to set up, in comparison to its predecessor,” says Charitha Subasinghe, head of the retail sector at JKH. But, the results too have been rewarding. According to Whippet, the first concept store in Attidiya generated 20% higher sales than the old format. With this newfound revelation, the company confirms that the new stores being added to its chain will take on the fresh new look and form, and all existing stores are expected to be refurbished over the next 18 months to resemble the design of its successor.
The timing for the revamp was off-putting. Consumer demand slumped to its lowest in five years. Rural consumers, the bedrock of growth, being affected by floods and drought was the key culprit. “In the past years, if you look at any company, where did growth come from? It was the rural market. But, last year, it was the exact opposite,” says Mangalee Goonetilleke, vice president of Asia Securities Research. The consumer foods, personal care and home care product categories all experienced negative growth for each quarter last year.
Despite the dismal showdown, retail chains are bolstering ahead with expansion plans and store upgrades, all in lieu of an impending consumption boom. In fact, the retail business has been somewhat immune from the unfavourable environment last year. Cargills Food City, the largest food retailer, boasts same-store-sales growth of 15% last year in relation to its 5-8% benchmark growth, according to Talal Marzook, head of Cargills Corporate Finance & Investor Relations.
‘Modern trade’ – a term used in retail as an identifier for supermarkets and hypermarkets – still contributes a meagre 12-15% of total FMCG sales, a major portion of the average basket of a grocery shopper. This is a lackluster statistic when considered in relation to regional peers like Vietnam and the Philippines, which have lower disposable income but higher supermarket penetration levels than Sri Lanka. “The number of products available in the market is around 20,000-30,000 SKUs. If you go to a large retail store in the Philippines, there are about 40,000 products (SKUs) at just one store,” says Marzook. But, things are changing. Today, traditional street corner shops are disappearing into oblivion. Especially in the urban-centric Western Province, the FMCG share of traditional trade retail plateaued on a precipice of a downward trajectory. While general retail trade will ebb and flow in tandem with GDP growth, modern retail will take on a predetermined course, reaping growth in the midteens over the next two-to-five years, according to Fitch, a ratings agency.
The reason for relative faster growth lies in the bullish assumption that modern retail would inevitably carve out a mammoth share of traditional retail as it expands its footprint. The euphoria is not unsubstantiated. However, urbanization will be a crucial driver. Fitch estimates that each one percentage point increase in the urbanization rate could improve access to modern retail for more than 200,000 people. The two macro-ingredients to retail success, increasing disposable incomes and higher urbanization, are all on course to being fulfilled in the long term, and retail giants are gearing up with aggressive expansion plans. Cargills, with its sprawling network of 315 stores, will include another 80 over the next two years. Keells is expected to invest $90 million over the next two years, doubling the 80 outlets of its urban-centric supermarket chain. Ceylon Biscuits Limited, the confectionary giant, is also planning to revamp its paltry retail brand ‘Star United’, and has already acquired a license for a Dutch retail chain SPAR International.
“We are not in a situation where anyone’s growth is coming at the cost of another,” says Subasinghe, explaining the local retail sector as a wide, open space up for grabs. In other words, the expected consumption boom is making any need for competition obsolete. ‘If you build it, they will come’ is the dominant consensus that prevails among the big three: Keells, Cargills and Arpico. Rapid expansion is the only thing that matters, at least for now.
Despite the eagerness for aggressive expansion strategies, the retail giants have cautiously begun to fine-tune their offering, sticking to their strengths. Cargills holds a penchant as a low-cost producer due to its supply chain efficiencies resulting from its vast network of farmers and stores.
In a hairs breadth margin environment like retail, Cargills has been promoting itself as the low price point seller. However, its suburban orientation has some ill effect on margins. In contrast, Keells is equipped with lavish parking spaces and a relatively premium product portfolio, catering to affluent urban geographies. In the event of increasing disposable incomes, Keells will have a slight upside to improve margins. Arpico, the highest-earning among the three, also has the smallest footprint. But, a fewer number of stores and its household accessories and furniture product portfolio garner higher margins, at around 150-200 basis points above those of its peers.
So, which company has the advantage? It’s too soon to tell. While global retail has long been dominated by online behemoths like Amazon and Flipkart, Sri Lankan retail especially consumer goods still languish in the brick and mortar space. The attempt at online retail among the big three retailers is lackadaisical. There are reasons for it, such as the perishable nature of grocery items, smaller basket size, high cost in packaging and close proximity of stores to consumers. This makes it a harder case for online consumer goods retail to truly flourish. Right now, it’s the mastery of the brick and mortar supermarket experience that matters. When the space for expansion dries up, it will be time for the dividends of brand identity and superior store experience to pay off. Until the next step of the retail evolution begets, online retail will have to wait.