It's raining discounts at hypermarkets

Faced with stiff competition from rivals and in a hurry to draw footfalls, hypermarkets are indulging in intense price war.

D Mart, the retail chain promoted by stock market investor RK Damani, is offering Superio, a local floor cleaner brand, at Re 1 against its maximum retail price of Rs 65, at its hypermarket in Thane, a Mumbai suburb.

The same hyperstore is selling one-litre pouches of Sunday sunflower oil at half its MRP and 950 gm of Brooke Bond Red Label tea packets at 25 per cent discount.

Faced with stiff competition from rivals and in a hurry to draw footfalls, hypermarkets, a larger version of supermarkets, are indulging in intense and, what some call, ridiculous price war.

For example, Star Bazaar, the hypermarket run by the Tatas, is selling products like Maharaja mixer grinder at 50 per cent discount, while Reliance Retail outlets in the same vicinity are offering 50 per cent discount on Baskin Robbins ice cream tubs, among others. Aditya Birla Retail's More hypermarket isn't far behind and is offering a bundle of fresh vegetables at Re 1.

"These promotions are to create a perception that products are cheap in that store. If a retailer is a late entrant in a city or an area, it often adopts such a strategy to break out of the clutter,'' says Purnendu Kumar, associate vice-president at retail consultancy, Technopak Advisors.

This, analysts said, was bound to happen, as after experimenting with neighbourhood stores and supermarkets, retailers were now focusing big-time on hypermarkets to drive sales volumes.

For example, Biyani's Future Group plans to open 140 Big Bazaars and Food Bazaars over the next four to five years, in addition to the 120 Big Bazaar stores it already operates across the country.

While Birla Retail plans to open 10 hypermarkets every year, Tata-owned Trent Hypermarkets plan to open seven such stores in financial year 2011.

In cities like Thane, Bangalore, Hyderabad and Ahmedabad which have seen a mushrooming of hypermarkets in the last one year, newspapers are bombarded with full-page newspaper advertisements on the offers.

Technopak's Kumar says these offers just cannot be sustained in the long term.

But retailers say they are not being reckless and the discounts are part of a carefully drafted strategy to attract eyeballs. "We are selling them (Superio floor cleaner) on a no profit-no loss basis. We buy them at Re 1 and sell them at Re 1. Since we give regular orders to our vendors, we can buy and sell at such prices,'' says a senior executive at Aditya Birla Retail, which operates six hypermakets in the country and plans to add 10 more every year.

Retailers say they are also hedging their bets on higher margin products. For instance, 60 to 70 per cent of Birla Retail's hypermarket consists of general merchandise and apparel, which have higher margins.

While retailers make margins of 10-20 per cent in food and groceries, in categories such as apparel and cutlery, their margins are up to 50 per cent.

Says Debashish Mukherjee, principal at AT Kearney, "There is no way retailers sell goods below their cost of procurement given the kind of margins they make. All the extreme promotions are funded by the manufacturers,'' he adds. In food and groceries, retailers make net margins of two-three per cent.

However, Mukherjee says regional brands and retailers' private labels can be exceptions. "Since such offers help regional brands get access to national retailers, they can sacrifice some margins,'' he says.

"Retailers can offer discounts on private labels as their cost of acquisition is 20-30 per cent lower compared with other brands,'' he adds.

But, some suppliers say they stayed away from undercutting prices. "It is misleading buyers. We also supplied our products at Re 1 but only as a one-time arrangement,'' says Bhushan Pandey, who makes and sells phenyl under the Sunny brand.