Raghu Pillai: After seven long years, RPG's head of retail may have finally found a formula that work

It's eight in the morning, and FoodWorld's 3,100-sq ft store on Pune's Fatima Road is getting ready for business. About 100 crates of dry grocery have just arrived and they must be put on appropriate shelves before the store opens in another half-hour. But that's not the only reason why the outlet's staff of seven is on its toes. FoodWorld first came to Pune in September 1999, and quickly opened four stores in tony neighbourhoods. But by February 2002, all of them had to be shuttered. Reason: Unviable rentals and poor footfalls.

Having found better locations and having ironed out supply chain glitches, the Rs 304-crore retail chain wants its eight Pune stores to turn profitable in another year's time. And managers like Devanand Shenoy, who was overseeing the unloading that morning, are racing to meet the deadline.

Of course, aching to breast the tape is RPG's retail head Raghu Pillai himself, who, after three consecutive years of cash profits, is hopeful of turning the bottomline black for the first time ever end of this fiscal. In doing that, FoodWorld, which operates a chain of 87 stores and is a joint venture between RPG Enterprises and Dairy Farm International, will be proving its sceptics wrong. More importantly, it may have perfected a retail formula that finally works. Says Pillai: "You can have the best plans on paper, but execution is the key. We've honed our product delivery.''

Fixing The Chain

Seven years ago when FoodWorld set up shop with a store in Chennai's R.A. Puram, it had no model to emulate and no established supply chain to plug into. It had to learn (by making mistakes, of course) as it grew, but that kept pushing the profitability horizon. Today, though, Pillai is less than three quarters away from real profits. So how did he do it?

K. Radhakrishnan, VP (Merchandising)/Foodworld "Ensuring consistent quality and stable prices to end consumers was a big issue"

One of the first things that Pillai and his team did to improve margins was to consolidate purchase-especially of staples, fruits and vegetables, and bakery products. The logic was simple. Not only did this category account for a huge part of the revenue (44 per cent currently), but also unlike branded goods, where the suppliers were well organised, it was a hugely fragmented market. That made sourcing time consuming and inefficient. "Ensuring consistent quality and stable prices to end consumers was a big issue," recalls K. Radhakrishnan, Vice President (Merchandising), FoodWorld.

The answer lay in starting from the basics. It identified 75 farmers near Hoskote and tied up with them for supplies. The farmers were taught everything-how to take care of the quality of their own produce, how to use pesticides, how to wash the produce, and also how to pack and tag them. The packed fruits and vegetables are then shipped in damage-proof crates to the consolidation centre in Hoskote, where the produce is visually inspected and sorted. From here, it get shipped via special vehicles (these are not refrigerated trucks because the costs are higher-at least Rs 4 extra per kg) to the stores every day.

Today, supply schedules are given three months in advance so that the farmers can plan their crop. Weekly orders are sent based on the previous year's purchase patterns, and the crops are harvested according to daily requirements. While FoodWorld prefers to source directly from small farmers, it also ends up buying from "consolidators" (intermediaries who help aggregate produce). Every month FoodWorld buys 370 tonnes of fruits and vegetables and 1,200 tonnes of rice.

FoodWorld now considers itself so good at sourcing fruits and vegetables (its head of perishables, K.B. Udaykumar, can actually tell you how many kilos of cauliflower, say, a three-acre farm will yield) that it plans to set up a separate chain for perishables. This would be an extension of FoodWorld, but have little dry grocery. At least five stores are to come up on a trial basis, and the number could go up to 50 if the experiment works. Meanwhile, FoodWorld is trying to rope in other corporate consolidators to build a critical mass. The supply chain will feed both its regular stores and the perishables-only outlets. "It took us four years to understand how best to consolidate, but we did it," says Pillai.

Consolidation wasn't restricted to fruits and vegetables, though. Branded FMCG products, which fetch a good 48 per cent of FoodWorld's revenues, were another category where volumes made a big difference to the margins. Here, however, the challenge was not so much back end supply chain management as front-end selling. FoodWorld had to be able to generate footfalls (read volumes), and that could happen only if its stores offered better products at competitive prices. By partnering with FMCG companies, the chain was able to devise special promotions. In fact, today it has a busy calendar of promotions that run through the year.

Understanding customer requirements and watching SKUs more closely have also helped FoodWorld grow its number of bills from 12 million two years ago to 17 million now. Although sec A stores generate more revenues because of high-value purchases, smaller sec C stores, says Pillai, match up in terms of margins because of sheer volumes.

Since a lot of the goodwill in the retail business is built word-of-mouth, FoodWorld has taken extra care to train its frontline staff. Every store manager is personally responsible for redressing customer complaint. If it is an availability problem, then the manager has to state when the product would be available. If it's a quality-related issue, the manager is empowered to offer replacement. In fact, a formal complaint redressal system, billed "Your Views Matter", is being put in place. Once formalised, a CRM agency will docket, monitor, and mine data based on complaints in order to improve customer service and store revenues.

Another thing that Pillai did over the recent years was to ruthlessly shutter underperforming stores. Since 2000, he has closed seven stores in Pune, Coimbatore and Bangalore that failed to break even in two years (typically, each store is given about six to eight months to break even). That's one reason why FoodWorld's foray into northern part of the country is hanging fire. Even today, 52 of the chain's 87 stores are in just Chennai and Bangalore. "Running a single store effectively in other metros is far more difficult than opening a chain of them in a single state," points out Pillai. But the chain's co-promoter, RPG Enterprises, is experimenting with a hypermarket format in Hyderabad that has ambitions of going national, too (See Giant: Indian Hypermarket).

Snafus and a slower-than-expected road to profitability has pushed back FoodWorld's own national roll out to 2005. Pillai, however, isn't complaining. Right now, his attention is solely on the bottomline.

additional reporting by Dipayan Baishya