Financial Times

Battle of the supermarkets
Retail chains in expansion drive
A big battle for the consumer's wallet is looming with two conglomerates, John Keells Holdings and Cargills Ceylon Limited earmarking a billion rupees each to expand their supermarket networks and the new management of Sathosa planning to revive the flagging fortunes of the biggest chain of all.

They have aggressive marketing tactics to lure consumers at a time when spending patterns are changing with a growing middle class and an economy on the rebound.
There is a marked shift towards frequenting supermarkets and away from the traditional town market or 'pola' and the neighbourhood grocery shop. But the penetration of organised retailing, particularly outside Colombo, still has a long way to go, hence the bullish mood of the supermarket chains, see much potential for expansion.

John Keells is to open 90 of the new Elephant House Super Pola outlets in and around Colombo with twenty of these outlets to be set up next year.
Cargills Ceylon, which will have 50 Food City outlets by the year end, plan to double the number of outlets in the next year.

Sathosa
And state-owned Sathosa, whose empty shelves and poor choice of products, made it difficult to attract consumers, is to get a new look under private sector management. JKH director Sumithra Gunasekera said the company plans to rapidly expand its supermarket chains, first in Colombo and its suburbs and thereafter elsewhere, because of the rapid growth of the market.

"We're looking at extensive growth of our supermarkets because we see that segment of the market is rapidly growing," he said. Adding,"We're now rolling out the new Super Pola supermarkets and we will have six this year.” He confirmed a report by Bartleet Mallory Stockbrokers that JKH plans to invest Rs. 1 billion in the next five years to expand its retail chains.

The existing Keells super markets will largely be in Colombo while Elephant House Super Polas will mainly be in the outstations. The two are expected to complement each other and the rationale for having two chains is that growth would be faster, Gunasekera said. Asked about the growing competition, he said: "There's room for everybody. Market dynamics are changing and modern retailing is going to be a way of life for consumers."

Growing Chain
Cargills deputy chairman and managing director Ranjith Page said the Food City chain was growing at 40 percent year-on-year, double the market growth rate.
Cargills is hiring about 100 people a month for its Food City chain with two or three outlets opening every month.

Cargills executive director Sidath Kodikara said their tonnage of vegetables had increased 10 times to 30 tonnes a day since earlier this year, putting the company's supply chain under some pressure. A subsidiary, Cargills Retail, was launched to spearhead the Food City expansion and the group plans to spend Rs. 1.2 billion over three years in what Page called a "very aggressive expansion" drive.

The new management of Sathosa said their immediate priority was to ensure enough stocks were available in its network of 160 stores. "We'll first put our house in order and then expand," Pravir Samarasinghe, director of Sathosa Retail and Richard Peiris and Company added.

RPC is part of the International Grocers Alliance, the consortium that took a 40 percent stake in and full management control of Sathosa Retail for Rs. 680 million. The others are Ceylon Biscuits and Carsons Cumberbatch and Co.

No layoffs
CWE chairman Lal Wickramatunge said there would be no layoffs under the privatisation deal. The new management has to offer existing staff jobs under the same terms and conditions including seniority and service and 4,000 of the 6,000 employees have already accepted employment.

The International Grocers Alliance has to open a new outlet if they close an existing one, according to the conditions of the privatisation agreement. Samarasinghe said an investment of Rs. 175 million is envisaged over two years to revive Sathosa.
"The first year will be tough but from the second year onwards we are confident we can make a profit," he said. Sathosa has a turnover of Rs. 550 million a month or about Rs. 6 billion a year with its existing weaknesses and the new management hopes to increase turnover to Rs. 10 billion in the second year.

Samarasinghe said the Sathosa chain had suffered quite a lot especially over the last five months for non-payment of suppliers that resulted in many empty shelves and turned consumers away.

Critics
Critics of privatisation have said Sathosa retail outlets were deliberately run down to justify the change and make out that it would do better under private sector control.
"Our first task is to make sure stocks are available," Samarasinghe said. "We paid all our suppliers and settled the dues. We will fill the stores with the right type of merchandise and increase the range."

The new operators have introduced professional management into Sathosa with private sector people filling key positions and its logistics operation comprising warehousing, transport and deliveries being outsourced.

A lot of training and development is envisaged to improve the service standards. Another priority is the total computerisation of all Sathosa outlets with the aim of introducing necessary controls and to improve supply chain management and ordering.

"Then we'll consolidate existing outlets and make the necessary improvements," said Samarasinghe. "We're not planning to close any outlets. We will evaluate the position over six months - some outlets are in extremely difficult areas. We would like to relocate them into more suitable places, such as locations with suitable parking."

Not affected
RPC's involvement in Sathosa will not affect the Arpico supermarkets, which are a different model and cater to a different clientele. "We consider the two as separate entities," said Samarasinghe. "They are positioned to different market segments."The Arpico supercentre model is that of a large format retailing centre with not only food but general merchandise as well. The chain is much smaller albeit being ideally positioned on the main arteries into the city.

A fourth Arpico supercentre is to be opened in Nawinna in early 2004 to join the existing ones in Battaramulla, Dehiwala, and Hyde Park Corner. RPC plans to open one or two supercentres a year with each new one estimated to cost around Rs. 150 million.

The penetration of the retail trade business among consumers is about 80 percent in advanced economies while Sri Lanka's national average is a mere eight percent. Most people here still shop at the town market or pola and the grocery store. "Now we see a shift taking place with more people using supermarkets," said Kodikara of Cargills. "We believe by having low prices of essentials like rice, dhal and sugar we're able to get consumers to have the benefit of shopping in Food City outlets."

Small grocers
Asked about supermarket chains driving the grocer out of business, Page said: "It's the other way around. The general retail trade standards are improving - look at the new bakeries and vegetable shops." Another consequence of the increasing penetration of supermarkets is that new outlets liven up surrounding areas. "Land values go up," said Page. "Other retailers upgrade and open shops next to us."

The big supermarket chains benefit from economies of scale, and say their bulk purchasing power along with the growing competition helps them reduce prices.
Cargills has forward contracts with farmers and transports the produce in its own refrigerated vehicles, avoiding middlemen and waste. About 40 percent of the island's perishable goods go waste owing to poor storage and transport.

Samarasinghe said Sathosa also has the advantage of buying in large quantities.
All three major chains say they want to give the best value to consumers and that competition will help drive down prices. "We're looking at giving the best value to our customers in terms of quality and price," said Gunasekera of JKH.

Common man
"Our supermarket is for the common man," said Page of Cargills. "Competition is very healthy and will benefit the consumer." Samarasinghe of Sathosa Retail said: "We want to ensure that we're known for providing our customers with products of good quality. We want to build on the Sathosa name - there's a huge amount of emotional attachment and loyalty towards it, especially among the lower middle class."

Back to Business