Vol. 2 :: No. 10 September, 2000 (Bhadra-Aswin)

Cover Feature

Supermarketing for Mass Marketing

In the process of modernizing retail trade business in Nepal, shopping centres claiming to be "Super-markets" or "Department Store" kept on cropping up in the capital and some major market centres of the country for some time till the recent past. The trend seems to have slowed recently after some of such stores closed down. Business Age tries to evaluate the current situation of this
Rs. 100 million a month business

Meanwhile, the trend of establishing supermarkets is spreading even outside the Kathmandu valley. For example, one of the SDSAN members is from Pokhara and another from Biratnagar. There also are a number of other such stores in those cities and also in Birganj and Dharan that have not acquired SDSAN membership.

The number of such big retail outlets is, however, not limited to that. Some supermarkets in Kathmandu valley have also opened their branches in other parts of the valley.

Take the example of Bluebird, which has set up a branch in the posh location of Lazimpat that houses most of the diplomatic missions in the city and is largely inhabited by people of the upper income bracket. Other such establishments with one branch each are Namaste Supermarket and Gemini Grocer. Though the owners of Sales Mart, a supermarket in Thamel, have two such stores, they are operated under different brands – the other is called Pick ‘n Pack (Thamel). With Gemini operating also in Bouddha, supermarkets have reached even areas far away from city centres.

This indicates that the idea of supermarket or department store business is gaining in popularity and expanding. But the closing down of a number of other establishments (see box) relates a different story. The SDSAN Chairman informs that more of such stores are about to pull their shutters down. Though unwilling to divulge the names, Tuladhar predicts that two supermarkets are expected to shut down very soon - before the forthcoming Dashain festivals.

But why ? According to Tuladhar and other owners of supermarkets, one contributory factor relates to the VAT imposed by the government since last year. While none of the chiefs of the supermarkets contacted was against the VAT in principle, each was of the opinion that either there should be no transaction threshold at all or VAT itself has to be scrapped. The concept of threshold is not compatible with the principles of VAT, they maintain and argue that by allowing threshold, the government has created a situation under which supermarkets are struggling to compete with the ordinary stores. Under the existing rules, businesses with transaction below Rs. 20 million per year need not register under VAT, so they do not have to collect VAT from the customers. This aids the small stores to price their commodities lower than that charged by a supermarket for the same products. Incidentally, the supermarket mortality is seen to be the highest during the last 12 months – the period for which VAT has been in implementation.

However, VAT is not the lone factor for supermarket mortality, as indicated by different stories of supermarket closure. Instances are available to show that if there are multiple supermarkets or department stores in a small locality, only one survives. Dai Ichi, Little Home and ‘Anand for you’ would have survived had they been not so close to Namaste (Pulchowk), Central (Khicha Pokhari) or Bluebird (Lazimpat), it may be concluded. By the same logic, observers predict that Blue Heaven is most likely to close down in face of stiff competition from Bhatbhateni. Still this logic is not enough to explain the reasons for all the cases of supermarket shut down. In closer scrutiny, one may come to yet other reasons for which supermarkets are closing down.

Take the example of Nanglo, the second supermarket to open in the country. Though the operators of the store were not ready to comment on it, observers think that it closed down because the business house that owned the store had to concentrate more on another operation (running the Bakery Cafe chain) that has been the core area of the group.

If we take the instance of ‘Anand for you’ that opened in 1997 and closed in 1999, the reason for its closure is altogether different. Rajkumar Lohia, who owned the outlet attributes the failure to the negative attitude of his banker (Everest Bank) which lent him money against the fixed asset (building) but not against hypothecation of the merchandise. So, the physical infrastructure was there providing the shoppers a good ambience with various facilities including a roof-top restaurant and massage parlour available in-house. But it was difficult for the management to store sufficient varieties and quantities of the merchandise.

Some of the existing supermarkets also suffer the lack of other infrastructure, such as parking space. As Lohia concedes, one of the problems of his store was the lack of enough parking space. In advertisements, all the supermarkets of Kathmandu valley claim to have enough parking space, but the adjective ‘enough’ seems to have different meaning for each supermarket. Some call it ‘enough’ even if it is sufficient to park 10 bikes only. Whereas, Park ‘n Shop has its speciality in parking facility incorporated in the brand itself.

This leads to another possible factor for the failure of a supermarket – viz copying. There seems to be a growing tendency to set up a supermarket without knowing the business properly. As Min Bahadur Gurung, the owner of Bhatbhateni Supermarkets, points out, people tend to enter a business in which they see others doing well. "In the past it was in carpets and garments, now it is in supermarkets," he comments and adds, "There is no professionalism". So, lack of professionalism in the owner is perhaps another reason for failure of some supermarkets that have closed down. Many shops can be found with self-service system and claiming to be supermarkets, but cramped in as small a space as in a big neighborhood store. Obviously, they cannot be taken as supermarkets.

Though the textbook definition may require the supermarkets to deal in everything (from ‘Noon’ to ‘Soon’, as Tuladhar says), it has not barred them from going into specialization. While Bluebird has clearly established itself as a store frequented mostly by the expatriates and the superich, the major target segments are Indian tourists and locals for Central and other supermarkets in and around New Road. Similarly, those in Thamel are mainly targeting tourists from overseas. About 60% of Central’s customers used to be Indian tourists, informs Tuladhar, though the proportion has now gone down to 40% because of less Indians visiting Nepal in the last six or seven months. Similarly, Puspha Ratna Shakya, Proprietor of Sincere Market, says, his store specializes in offering the widest range of readymade garments. "Unlike in other stores, we can offer winter garments not only during the winter but even during the summer", he claims. Likewise, while Welcome mainly sells readymade clothes, Tamrakar House has specialized in toys in addition to readymade clothes.

Despite such specialization, it is the variety of merchandise available that determines the success of a supermarket, because wider the range of products available, larger the volume of trade and easier to keep the prices lower by keeping the retailer’s margins low. Therefore, major supermarkets in the capital can be found selling goods at margins as low as 5% or 15%. Failure to manage with so low margins and thus being forced to keep the prices higher to meet the overheads, seems to be the most plausible reason that explains the closure of many of the supermarkets.

In such a situation, the supermarket owners argue that their business should be accorded a status of an industry entitled for facilities enjoyed by any other industry.

But that status is not accorded by the government despite, what Tuladhar calls, "repeated representations made to the government". Therefore, the major complaint of the supermarket owners is against the negative attitude of the government towards supermarkets. "We pay VAT, we employ large number of people and consume a lot of electricity, as the other industries do. But we do not get the same facilities that they get. Since we operate at a minimum profit margin, we should not be treated at par with other traders", is the argument they have.

As claimed by the respective supermarkets, it is found that Sincere employs 15 persons, Central 52 persons and Sales Mart 80. Bhatbhateni’s and Bluebird's numbers reach an impressive 150 and 110 respectively. And the investment they have made is equally huge – Rs. 30 million by Bluebird.

Another set of complaints that the supermarkets have is against the bankers. According to Shakya, banks are still treating supermarkets as any other shop in the street. However, Tuladhar and Gurung think that the attitude of the bankers is gradually changing towards being positive. "Particularly, the joint-venture banks are very positive", comments Gurung.

Given the problems the existing supermarkets are complaining of, Nepali consumers may only dream of ‘hypermarkets’ as of now. Hypermarkets are an extended form of supermarket, usually located on the outskirts of towns and cities where space is plentiful. In contrast, supermarkets and department stores are located at city centres. However, with a number of players already established firmly in the business, supermarkets themselves can be expected to go on growing, as that is the only way they can survive in face of the stiff competition they have to face with the smaller shops. As of now, the next step for the existing supermarkets in Nepal is to start introducing their own-label brands of goods, instead of selling same brands that are available at every other corner-store.

By Madan Lamsal

"Supermarket for Rickshawallah too"

What are the specialities of your store?

We have tried to provide maximum number of consumer goods, items of daily necessity. So we have concentrated on grocery, household goods, readymade garments and shoes. Similarly, we have jewellery, cosmetics and electronic goods besides colour lab, beauty parlour and dry cleaners. In comparison to other stores, we cover wider range.

How is the customer profile?

I believe, my concept is a little different from other’s who look to cater to the upper class or upper middle class people. But I look to cater to the general mass. My desire is to see a rikshaw puller come to my store for a Coke and buy a T-shirt. I also hope the Royal Family members continue paying visits to my store. Other than the King, almost every member of the Royal Family has honored our shop by visiting on numerous occasions. And we might even open a separate store for the Royal Family. The Prime Minister also has visited our store. So my ambition is to cater to every class of people. However, I have not been entirely successful in this so far. This, I think, is because the ordinary people still do not accept that supermarkets are also for them.

hat are the factors of success for department stores?

Product and price range are the key elements. For example, the price range of grocery items that we have cannot be found in other stores. And so too with household goods, ready made items, cosmetics, jewellery, electronic items etc. Location is also of great importance.

VBut department stores like Nanglo, Dai Ichi and a number of them, which were more primely located, have closed down.

Attitude also plays a key role because even if the location is fine, product range is good and price is reasonable, a customer would not visit the store twice if the attitude of the owner or the sales people was degrading. So it is not one factor but a combination of numerous factors that governs success.

What do you think is the reason behind department stores closing down?

The trend here is for people tending to go into any business that seems to be doing well. First it was carpets, then garments, then department stores and now it is Pashmina. There in no professionalism.

What is the attitude of the financial institutions, general public etc. towards this business?

Joint-venture banks that have come in have kind of changed the trend and system here. Because, earlier apart from a few business houses, banks very seldom would provide finances to small businesses. But joint-venture banks have changed that.

What about the government?

The government’s attitude is not bad but it is also not very practical. For example, the issue of VAT. No matter what other business people think, I personally support VAT. It is important that everyone pays tax because without that, the country would not run and so too our businesses. But the implementation should be systematic, there should not be blind imposition. Another disagreeable aspect of the government’s attitude is that it tends to treat all business people as if they were thieves. And that is why there has been all kinds of tax evasions and the like. An environment should be created where taxpayers are honoured. But that is entirely lacking.

What is the attitude of the general people?

It is very positive. A few years earlier, of course, department stores would price their products on the higher side, leading the people to believe that those big stores were meant for higher class of people. But that has completely changed now.

Do you have plans of opening a branch as some other supermarkets have done?

A branch is in the offing, but it will take time. We have acquired a plot of land in Maharajgunj-Chakrapath area. And construction will begin shortly.

"Department store is an industry"

The overheads are very high. Unlike small shops where having one or two staff is enough, I employ 15 staff. The electricity and telephone bills are high. Maintenance expenses are high. You also have to face occasional thefts and pilferages. But the attitude among Nepali people is changing. Initially, department stores were thought to be expensive and meant for the higher class of people. But that is not so.

What about the attitude of the government?

The government’s altitude has not been positive at all. Department store is the first place the people from the VAT department visit. In reality, there is no difference between a small shop in the street and a department store. But while the small shop does not have to pay tax, department stores have to.

The government must understand that department store is itself an industry. Any industry, which is employing 5 or 10 people, is exempted from income tax for upto 5 years, likewise department stores must also be exempted from income tax in the initial stage. Department stores are a source of employment, they are adding to the government’s revenue collection, they are consuming big amounts of electricity. The governments most consider this.

What is your line of specialization?

Ready-made garments. We have stocks that cater to every age group. And unlike other stores, we can provide summer garments during the winter as well. We keep all kinds of stocks. We also have cosmetics, food stuff, luggages and suitcases, etc.

How is the business going?

Our store was opened only two years back and the sales have been going down. The sales of every store are diminishing, as I have heard. The per capita income or purchasing power of the people in decreasing. And in comparison, things are getting expensive.

What are the determinants of success?

Location is an important point. But that is not all. Schemes have to be thought, like I have been conducting fairs. Advertisement is obviously a key factor in today’s world. Being able to provide a wide range of products is also important. The attitude towards clients is also important. Success can only by achieved through combination of all these factors.

"Growth has reversed recently"

What has the attitude of the government been like?

The government has been treating us very much like smaller shops in the street. But supermarkets can play a role in making available quality products to the people. So the government, banks and finance companies etc., must change their attitude towards us. It is necessary that the government be supportive and provide us some facilities. For instance, the electricity tariff has gone upto over Rs. 7 per unit. The burden will actually be borne by the customers. The government should treat us like an industry and give us facilities on electricity, or exempts certain taxes, because our profit margin is nominal and ultimately it is the people who are going to benefit.

But the general people tend to think that supermarkets are expensive?

Yes, but on the contrary supermarkets are in fact less expensive than small road-side stores. Because in contrast to these small shops, we purchase bulk volume while the street shops keep a few pieces of the items, and so prices vary. Also, we are promoted by the company. Because displaying their products works like advertising. So, the companies offer us discounts for putting their products on display which allows us to sell the goods at cheaper price. And over five years, more people are visiting supermarkets and that concept of associating supermarkets with costliness is dying out.

What are the problems in the business at present?

Our main problem is related with VAT. We have registered under VAT because we believe it is meant for the development of the country and we are not opposed to it. But the government has put us at a disadvantage by setting a criteria under which only those doing business exceeding Rs. 20 million are subject to register under VAT. By this, we have lost the competitive advantage over smaller shops. We have forwarded our complaints time and again and although the government authorities have realized our problem, they have not done anything. We do not get the VAT bills from the suppliers. We have complained to the government about this as well. The government has directed us not to purchase from non-VAT bills, but that is not possible in the present context. We have open borders with India and Khasa. Goods are coming in illegally. Another problem is related with under invoice which we have not been able to overcome and about which we have talked to the government on several occasions. This has made it difficult to compete with smaller shops. These shops can sell domestically produced goods quite cheaply while we have to charge VAT on these items. So we will be selling things at a costlier price and this will naturally lead people to believe supermarkets to be expensive.

How has been the growth over the years?

It has been very positive. It has been around 13 or 14 years since Bluebird was established and 11 or 12 years since Central was established. Until two years back, there was growth trend. But the government’s policy has not been in line with what we want. Like I said, VAT has affected big supermarkets and department stores badly. In the last six months or one year, the number of SDSAN member has gone down. This is to say that big stores have closed down. I have also heard of some other big stores planning to close down. The capacity to survive has diminished.

How is your department store different from others?

As a supermarket, I agree that we have not been able to provide the range of consumer goods, like canned food, that is available in other supermarkets like Bhatbhateni, Bluebird or Namaste, because we had principally targeted Indian tourists. In the 11 or 12 years of our operation, we have found that 60 percent of our total customers are Indians, and the remaining 40 percent locals. This area is mostly frequented by Indian tourists and locals rather than nationals from other countries.

What other unique features does your store have?

Our stock comprises all kinds of goods that come from industries, import or trade. We also have our own import section for glassware, cosmetics. We also have our own factory for audio cassettes and CDs. We are also well-stocked in items that are in much demand such as readymade items, household goods, electronic goods, and so on.

"Indifferent Government & Satisfied Public"

What about the modes of payments you receive?

About seventy two percent of our sales in through cash. Of the remainder, 23 percent is through credit card and 5 percent, cheques.

How did you come up with the idea of this business?

During my studies in Salzburg, Austria in Hotel Management, I used to shop at the high hypermarket. On my return I thought that this idea could sell in Kathmandu.

What are the major factors of success in this business?

The most important factors of success in the department store business are the variety of products, reasonable prices and ample parking space.

How do you find the attitude of the government, the general public and banks towards this business?

Government is indifferent to supermarket growth. Public is extremely happy and satisfied due to the price competition among each other. Suppliers are most co-operative due to the increase in supermarkets. Banks love competition so that they can finance new supermarkets.

Department Store With Cyber Cafe

What is the profile of customers in your store?

Ninety-five percent of our clients are tourists who remain here for five days or a week. Expatriates working in NGOs, INGOs and other organizations also frequent our stores. Ninety-nine percent of our sales is through cash, and the remaining one percent is through credit cards.

What could be the factors of success?

In my opinion, the prime factor is location, and then payment to parties. If your payment scheme is good, you will get the goods in time, and possibly at a lower price. Otherwise the importer and supplier will not make available products in time. So payment to suppliers has to be good. And goodwill also plays an important role.

How do you find the attitude of the government and general people towards this business?

A few years back, the general people would hesitate to enter big stores. But that concept has now changed and people prefer to shop in big stores rather than small ones. As far as the government goes, it has always treated businessmen as robbers. Irrespective of how cleanly you run your business and pay taxes, you will always be looked upon as cheats. For instance, if I pay revenue worth Rs. 100,000 this year, the government wants me to pay at least that amount the next year. But my sales might have gone down, or I might be working at comparatively lower profit margin. We have no problem with VAT. We are in fact even willing to keep someone from the VAT Department at our sales counter. But the concept of the government is not right. They think that all businesses are running on profits.

Why do you think some of the department stores like Dai Ichi and 'Anand for you' have closed down?

In my view the stores that shut down some time back was forced to due to circumstances. The general people then were not willing to enter big shops because they feared products would be expensive there. But the stores that are closing down now are doing so owing to competition. They have not been able to survive the competition which is so stiff that profit margin is very very low. If you take the instance of Dai Ichi, there were already two supermarkets, Namaste and Gemini, operating in the same area. These are big established stores and both have separate branches. So it became extremely difficult for Dai Ichi to compete.

Superstore Mortality

Some Existing Supermarkets

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