Spencer's Retail Limited (SPENCERS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Spencer's Retail Limited Q3 FY '24 Post Results Earnings Conference Call hosted by Batlivala and Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akhil Parekh from Batlivala and Karani Securities India Private Limited. Please go ahead, sir.

Thank you. On behalf of B&K Securities, I welcome you all to the Spencer Retail's Mid and Quarterly Conference Call of Third Quarter FY '24. From the management team, we have with us Mr. Anuj Singh, CEO and MD; Mr. Saket Sah, Group Head, IR and ESG Reporting ; Mr. Pankaj Kedia, Vice President, Investor Relations; Mr. Harshil Gathani, Chief Manager; and Mr. Sandeep Banka. Without taking much time, I'll hand over the call to Mr. Anuj Singh for his opening remarks and post which we'll open the floor for Q&A session. Over to you, Mr. Anuj.

Thank you so much, and good morning, everyone. My name is Anuj and I'm the MD and CEO of Spencer's. Very happy to talk to you today post our quarter 3 earnings release. I'll start by giving a brief personal introduction. So I joined the company in the end March '23. So it's been close to 10 months that I have been at the helm of the company. And I come in with experience both in the FMCG domain as well as in retail. I've had a long career with -- in FMCG, both in India and internationally. I've worked with Unilever and Nestle. And in retail, I was at Walmart India in their B2B business as their Chief Merchandising Officer for 3 years prior to joining Spencer's. So I'll start by giving a brief context of the business, and I won't take you back to 2 years, 3 years, I'll keep the context limited to when I started 10 months ago. So, obviously, at that point of time, the organization had gone -- was going through and is still in the midst of a pretty challenging situation both external and internal. But as the new management, new leadership, we kind of took a stock of where we were in, let's say, April '23, what we quickly realize is that, look, we do have a right to win in the space which we are. And that's stemming from the fact that we have a strong legacy and a very high brand recall, owing to the fact that we are probably -- not probably, we are the first and the pioneering modern trade retail format in India going back to over 2 decades. We also have a right to win because we have a unique and differentiated positioning and offering both on Spencer's as well as on the Natures Basket side. And we were quite strong in certain focus geographies while we did not have a pan-India footprint. So clearly, the task was to build on some of our inherent, I would say, strengths or right to win and really turn around the organization both from a top line and a bottom line part of it. Some of you we would have -- we had interacted in September when we were talking about what actions we have taken in quarter 1 and quarter 2. And we had clearly called out that, look, for us, H1, which is quarter 1 and quarter 2 was in large senses, recalibrating the business. As we said, this recalibrating of the business was looking at it very dispassionately from areas where -- which were not adding value and were being dilutive to both either the top line or the bottom line as well as looking at areas which were not making a strategic sense. As a result of that, in Q2, we took some big strategic calls. We exited 2 states, Kerala and Tamil Nadu. We were of the opinion that they were not of a certain scale and they were not in the strategic clusters, which we wanted to focus on. This meant that we actually shut down 20 stores. And if you look at it from a top line, it did have a top line impact of about INR 100 crores. But it was the stores were also loss-making. So you would have -- we would avoid on an annualized basis close to INR 18 crores of EBITDA loss. So it was a tough decision, but it was the right decision, which we took. We also then looked at -- looking at rightsizing the organization, looking at our operating structure, which was to the scale that the business was, and we rightsized the organization in Phase 1, which was both at the corporate office level as well as the store level. So I think these were some actions which we took, which obviously, if you look at the H1 results, does have an impact on the top line and the bottom line as far as H1 was concerned. So therefore, clearly, for us, Q3 was a quarter where some of the actions which we have taken should have started playing out and resulting. And therefore, if you look at the Q3 results, the earnings which we shared yesterday, on a Q3 basis, I mean, quarter 3, we reported a 2.5% growth on a year-on-year basis and a 14% growth on a quarter-on-quarter basis. While this might not -- this might seem modest, 2.4%, I think it has to be looked in the context of what the quarterly performance was in the last 3 quarters. It's still too early to call it a turnaround, but it is clearly, I would say, a phase where we are shifting momentum, and we are turning around from experiencing degrowth to getting even modest growth of 2.4%. If you look at -- obviously, this is both on Spencer's and Natures Basket. Nature's Basket has delivered a stronger growth, higher growth, 10% growth on a year-over-year basis. Margins are strong on Natures Basket, 29.6%, which is an improvement. And therefore, Natures Basket has also contributed to this overall 2.4% growth which is there. On the Spencer's stand-alone basis, like I said, the growth on a year-on-year basis was 1.2%. But if you net it out for the stores closure, the like-for-like growth is almost 6%. So with the same set of stores, excluding the stores closed, there is good growth which is coming through. Obviously, this is a festive quarter. So we are not discounting the momentum which you get or the tailwind which you get because of festive. In that context, I think the performance is strong. As I also mentioned, we -- it was not just -- the initiatives are not just focused on top line, but it's also looking at costs. And we did effect measures to control costs, both at the store and the corporate office. This resulted if you can -- I mean, some of you can pick up the numbers, the benefits would start flowing, continue to start flowing in quarter 4 and quarter 1. But in quarter 3 itself, there was close to a 9% reduction in operating expenses. And this is what has lifted the EBITDA for the quarter. The EBITDA for the quarter is 250 basis point improvement on a year-on-year basis. And I think that should give confidence to all of us that we will be able to drive both the top line as well as the bottom line. So really, I mean, that's the crisp short commentary on what quarter 3 was. I think going forward, this -- like I said, this reaffirms the belief and the confidence in the plan to drive top line and to control costs, to really accelerate our path to profitability. The key priorities for the organization will, therefore, continue to remain how to grow the top line. And our top line drivers will be really focused on the 3 geographies where we operate in a clustered manner. And these geographies are East -- primarily West Bengal, Eastern UP, which is we have good concentration of stores in Banaras, Lucknow, Gorakhpur and NCR. So that is the second cluster and the third cluster Hyderabad and Coastal Andhra. So Telangana and Coastal Andhra. So again, the plan would be to grow our top line focused on these stores. While we did close down, take the call on closing down stores, it does not mean that this is going to be a one-way street, and we're only going to be looking at rationalizing stores. We will expand and we will open new stores, but we will do it in these key clusters. In quarter 4, we'll have about 25,000 square feet of trading area, which will come online. And we expect for next year as well we will have -- between Natures Basket and Spencer's, we'll have 1,00,000 square feet of trading area. So we will open new stores. We are also taking conscious calls, judiciously picking stores where we will refurbish some of the stores, which are -- we have stores which have been with us for 12 to 15 years. So we will refurbish stores as well in these areas to elevate the overall experience. So growing top line through focused expansion and focused execution in these clusters is 1 component. The second part of our top line expansion plan centers around our omnichannel business. We have a -- we launched -- in September, we launched, what we call, the Express delivery business model in Kolkata, and we have a pretty unique e-commerce model because we do our fulfillment from the stores, which we have for a variety of reasons. It avoids us having to incur additional costs in terms of putting dark centers, fulfillment centers, et cetera, and it helps us to spread our existing assets as far as the stores are concerned. It used to be a slotted delivery kind of a system where you pick your slots, but in Kolkata, we -- in September, we launched an express delivery where the proposition was a wide assortment of 50,000-plus products delivered within hour. So it was not the 15-minute delivery, but was still within 1 hour. And we believe that, that's a relevant proposition in grocery for -- where you can give variety, but you can still deliver within 1 hour. And with our footprint of stores in Calcutta, we are able to service 99% of the pin codes from our existing network, which is there. This has met with good response. We have seen a good increase in the Express orders and with good ticket size. So this has again given us confidence that this is a model which we will continue to expand. Our share of omnichannel today is 12%, and again the plan is to keep pushing this up towards a number which will be 20% in the 12- to 18-month period. So really, I mean, the second center point for growing top line is around driving this business. It's not just going to be in Kolkata. Based on the model of Kolkata, we would look at -- we're looking at a couple of other cities. Again, the key criteria for us is, where we can -- where we have the ability to deliver this proposition of covering the entire city from our existing footprint of stores. So there are -- like I mentioned, we have cities like Banaras and Lucknow where we have a good concentration, and we will be expanding this Express delivery component in those 2 cities as well. The third part of our top line expansion would be obviously continuously looking at our portfolio and our mix of categories, we are a multi-category retailer. So it's important to manage that portfolio very well. We will look at increasing the mix of our general merchandise, which is complementary to the food. We will be -- we will continue to be a food-first retailer. So food, which is everything from fresh to packaged food to staples will be our driver. But we will also have a very complementary mix of general merchandise, which we all know helps us in terms of managing the whole margin mix. Our 2 big USPs in our portfolio, or I would say differentiators are fresh, which is fish and meat specifically. It's something which is also a frequency builder. And we do liquor retailing in East. We will continue to build on these differentiators to have a healthy portfolio and a mix, which is not just from a margin point of view, which is internal, but also from a customer point of view, where we are offering products which are differentiated every day, and then therefore, drives stickiness and frequency. So those are 3 top, I would say, top line drivers. The other key part going forward is this cost optimization rightsizing. This is not a one-off exercise. This is a continuous exercise to make sure that we operate in a very efficient and a lean manner. And like we said, we did one Phase 1 of the cost optimization exercise in quarter 2 of this year, which centered around 20-plus stores, which we exited, plus some rightsizing of the organization at the corporate level. We are continuing that in quarter 4. And really, the plan is from last year's level, we are looking at taking out close to 10% to 11% of our operating costs compared to last year, which is a significant one, but we are confident that we can identify the inefficiencies and areas where we can remove that. So really, cost would also remain a key focus. And I think driving top line and improvement of cost would have that impact on EBITDA. As we've seen a little bit of it in quarter 3 as well. The impact in quarter 3 of improving sales, keeping our margins same, led to a RGM increase of 5%. Your costs came down. And therefore, you saw that delta impact as far as the EBITDA is concerned. So top line and cost would be the focus. And then looking at different efficiencies, scaling up the share of our online and e-commerce business. So I think that's where we will continue focusing. If I were to give you some additional color on Natures Basket. Natures Basket again starts with the fact that -- we do have a very definite and defined right to win in this. It's a unique premium positioning proposition in retail sustaining good gross margins, 29.6% is what I kind of called out. And this is around -- centered around an experiential shopping environment focusing on food, fresh as assortment, fresh including everything from cheese to vegetables, fruits, exotics, imported, meat, charcuterie, a good bakery section. So a very, very relevant premium proposition. And the fact that it is positioned like that. it also operates in a very focused geography. So we are present in 4 cities, and again, growing it in those 4 cities. So Natures Basket would continue to be driven, keeping true to this proposition of being kind of a gourmet retailer. We have -- In this quarter, we've launched India's first luxury grocery retail format called the Artisan Pantry. The first store was launched in -- at the Palladium Mall in Bombay with a very high experiential zone, which has everything from a large selection of cheese, a great bakery section, even a salt bar, a big mushroom collection. Also having things like, a cocoa and a chocolate center. So really, I mean, driving this experience is what Natures Basket could be, while keeping our operating costs quite lean, and the fact that we are focused in focused geographies, 4 cities helps us to do that. So Natures Basket would also be a story which will be driven on staying true to the proposition, driving top line, as well as keeping your costs in control. So that's really how we want to drive this. If I were to summarize, I would say that, look quarter 3, like I mentioned early, we've played out some part of this strategy, and we see that coming through with top line growth as well as EBITDA improvement. The task on hand is to make sure that this is not one-off and we keep sustaining it both into quarter 4 and going forward for next year. But we are quite confident that this is a plan which will help us to drive the organization towards growth and EBITDA improvement as far as. So I'll stop at that, and we'll open it up for questions from the team.

[Operator Instructions] The first question is from the line of Bharat Gupta from [ India Retail ]

It's Bharat Gupta from India [ Inside ] Value Fund. So, sir, I have a couple of questions. First, in regard to the debt profile. So can you just share what is the current debt number? Because as such, whatever numbers which you have reported, so thing which points out to that, though we are not doing that meaningfully in operations, but we are stuck up and there is a lot of pile-up of debt. I think in September numbers, it was close to INR 650-odd crores. So what's our plan? Like in terms of scaling up also, we will be requiring good amount of fund raise. So my question pertains to the debt profile. So, sir, can you share what was the debt number with respect to December quarter, the gross debt number?

Yes. So at the -- if you look at the debt position at the consolidated level, debt is at INR 785 crores, which includes [ INR 100-odd crores ] at Natures Basket and at Spencer's. And look, we are cognizant of this. We're also looking at it in relation to the equity. And we believe that we have -- at the right time, we will look at how we bring in more funds, but the group remains committed to the business. And I think our first task as a business is to improve the operational metrics, which like I mentioned is on the right step. And then I think the funds and managing that will be a natural outcome of the improvement which comes and the group is committed to that.

But sir, in terms of even if you want to scale up and create new experience stores, so we will be requiring a good amount of CapEx. And also our working capital is also stuck. So any time line to which we are adhering right now? And with respect to any like spin-off or any like we want to sell off any particular segment. So we -- are we excluding any opportunity with regard to it?

Yes. So as it comes to, do we have sufficient working capital as well as making the investment in the stores? Absolutely, this is as part of the plan for the year. We will have working capital as well as -- we're not -- like I said, it's about a judicious expansion. We're talking about 1,00,000 square feet. So we are well capitalized and funded for that. When it comes to stake sales and looking at this thing, I mean these are premature kind of conjectures. And we will -- at the right time, we'll keep evaluating and doing it, but nothing concrete at the moment.

Sir, secondly, like in terms of -- like we have not been able to do successfully with respect to markets in certain states. So what kind of, like, you can say lessons which we have learned from that and how we want to scale up further? I know we want to confine majorly towards Eastern UP, Bengal but any particular plans which we have, like, with respect to scaling up within those segments also? And particularly, are you evaluating opportunities also further in respect to other markets?

Yes. So I think the point is that it's -- our ability -- it's not that we were not successful. I think what we said is given our size and given our kind of our operating structure, it makes sense to operate in clusters with high penetration of stores. So just to give you an example, in Chennai, we had 9 stores, small stores, most of them were small stores. And, therefore, to drive efficiencies, focus stuff, even to do a marketing campaign too, it becomes very suboptimal if you don't have scale in that particular thing. So the reason was not that we were not able to drive thing. I mean I think that comes with a little bit of concentration as well. In the East, we have, like I said, in calculate, we have 42 stores. So the ability to service these stores efficiently from a supply chain perspective, to do a campaign, which can be where you do a media campaign, which is isolatable to that state, becomes far easier and more efficient. So I think that was the reason why we kind of took a call to focus on this. And second, we also believe that within these clusters, there is still headroom for growth. So there is no need to have a token present in 6 geographies and then kind of be inefficient in terms of servicing them. We believe that we can drive growth in existing 4 or 5 clusters, deepen the penetration of store counts in these clusters and service them more efficiently from a supply chain perspective as well as from a whole communication perspective. Otherwise, the cost of servicing and the cost of communication at a multistate level at all India level, just escalates. S I think it was -- that was the decision. And therefore, we will first, deepen our penetration in these 3 clusters. And obviously, once we get to a certain level, we will evaluate if there is merit in expansion into more strategic clusters. But right now, I think we have enough of opportunity, enough of an existing footprint to expand in these 3 geographies, and that is what we will do.

Right, sir. Sir, what will be a market share in those regions, particularly where we are operating in the branded retail space?

There's no Nielsen equivalent in retail. So it will be very difficult for me to give you a number. But we are -- in the East, we are a strong leader. So I mean that's clear. And again, the task is to ensure that we maintain this leadership. And which is why it goes back to, what I was saying earlier, it is about strengthening, deepening presence and consolidating your leadership. So yes, I mean, in areas where we operate in cities, we have clear distinct leadership, which is why when I said right to win, right to win is in these 3 clusters, and that is where we want to focus.

Yes. But sir, in terms like -- in terms of competitive intensity, I think with respect to other, there are different players. All in together, everyone is trying to capture and gain the market share across pan India basis. So, like, how we want to position ourselves and distinct ourselves with respect to other peers? And I believe so then comes the question on funding as such because we are also combined with respect to the debt side. So, like, even when we want to scale up our operations side, so we would be requiring like we want to curtail down on the cost part as well as reduce the debt side. At the same time, we also want to have a growth ambition. So, like, how we want to match the 2 things and particularly grow out?

Yes, I think, we've already answered that question. So again, just summarize, look, we have -- we are adequately funded to -- for the business both from a working capital as well as the store expansion for next year. And with respect to competitive intensity, yes, this is a competitive thing. But also, let's remember the context that modern trade in India today has 6% to 7% of the overall grocery. So it's about not just a market share gain, but it's also about gaining in overall the modern trade pie as well as in e-commerce. So I think there are enough growth opportunities and we are well capitalized for the year to kind of execute our plans, both from a working capital and a store expansion part.

Sir, also with respect to Natures Basket, I think it's been more than 2 years now since we have boarded out from [indiscernible].

Sorry, I couldn't get you clearly. Could you be a bit louder?

Yes, sure. I was just asking with respect to Natures Basket. So it's been more than 2 years now since we started out with the operation. So particularly in your assessment, how long will it take to stabilize now? Because on the EBITDA front though, we might -- we have been profitable with respect to this quarter, but eventually, if you want and be on the profitable side, so how do you see the assessment from your side? Like, how much time will it take to stabilize on the operations side? And what kind of an addition with respect to stores are we looking at?

Yes. So I think just to factually say, we acquired this in 2019. And by all measures, the operation has been quite stable. In fact, we are adding stores, like I mentioned, we've added a new gourmet part of it called the Artisan Pantry. So yes, we are growing. And I think if you look at -- again, I mentioned, if you look at Natures Basket, financial performance, almost 30% gross margin. So that's evidence of a more than stable operation. We've got 10% growth year-on-year, 13% quarter-on-quarter. So I think both of them do support the fact that it is -- the positioning is well defined. We are delivering on that, and it is translating into financials. On your question on profitability, well, I mean, if you look at the numbers, a INR 6 crore EBITDA in the quarter. And if you look at -- if you take out the noncash part of it, I mean, it's a INR 1 crore loss, right? So I think this is something which is easily fixable with growth. And I think that's not -- I think the primary driver here is to build the scale over here. And like I said, we will be adding stores in the focused geographies. That will help us with the margin profile it has. It will help us. I mean at 7% EBITDA on that quarter, that is something which will set us up well on scale to deliver EBITDA.

So the margins of near about 29% on the gross side. So that will be on a sustainable basis in the segment?

Absolutely, absolutely. It's almost 30%, 29.6%, right?

Right. But sir, in terms of the footfalls, so across the stores, like whether it is Natures Basket or even in Spencer's. So the footfalls are just equivalent to the pre-COVID numbers or...

Sorry to interrupt, sir. Can you join the queue for the follow-up question. There are participants...

Thanks. I will join sir.

And the next question is from the line of Kunal from Fair Value Capital.

Sir, my first question was about Spencer's Retail. How are your D2C brand tiers progressing in there? And what was the quarterly run rate for the latest quarter? And can you also provide any guidance?

Sorry, your question was on D2C brand?

The D2C brand tier.

So look, we don't single out and say a driver for operational thing is not then I should have x% growth of D2C. I think the way we look at it is D2C brands are -- they should be fairly represented in our assortment because they are a signal of the fact that these kind of offerings are gaining traction with consumers. And if we want our overall proposition and format to be relevant to consumers, we need to make sure that we have the right assortment. Just because it's not a fact that if it is D2C brands, in a certain category, if there are 100 brands launched, we don't put a KPI saying I should have 50 out of those 100 brands. We will put the brands which are relevant with our consumers. because, ultimately, our goal is not to build D2C brands. That is the job of the D2C brands. Our job is to build an assortment, which is relevant to the consumers and the evolving consumer preferences. And if -- as and when D2C brands evolve, they are an integral part of our assortment. So today, we have D2C brands like Mamaearth is well represented. We have brands in coffee. In health and beauty, you look at brands like sugar, you look at brands like Plum. We do have it, but we will not get swayed and have an overrepresentation. Every brand, and in fact, as part of efficiency, we need to keep a tight assortment, an assortment, which is reflective of what the consumer preference is, but also has a certain velocity and that's the way we will control it. Otherwise, just listing D2C brands or any other new brand is -- comes back to bite you from an efficiency point of view. So we are balancing that with -- as a particular brand in a particular category evolves, takes market share, we do give a representation. But we have been a launchpad for quite a few D2C brands. So I hope I've answered your question. We don't have a separate metric, and we don't track the metrics as saying that in a particular category, x% share should be given to D2C brands. It's a function of how the D2C brand does in the market ?

That was very helpful. My next question was about the private label. How is the growth traction you're seeing in there? And can you also provide some data about the margins? And what is your thought process behind scaling this segment?

Yes, I think a very good question. So look, I mean, a private label is always retailers, I would say, secret weapon to improve the mix. And for us, we have a good mix as far as the private mix private label business is concerned. Of course, it varies across category. I would say in staples, we have a very good private brand listing, and it comes at a margin, which is normally accretive to the category margin. Our focus has been -- to be honest, I mean, our focus has been on staples, and we are looking -- we have a presence in some of the other FMCG categories as well. But if I were to give you a blended mix, it's in the range of 11% to 12%, which is -- which I would say is quite healthy, right? And like I said, it comes at margins which are accretive to the category margins.

Understood, sir. That was also helpful. And the next question is about the Natures Basket. How is the competitive intensity shaping up with the -- from the quick commerce players?

Yes. So I think Natures Basket, like I said, has a very unique positioning. In fact, I don't want to sound arrogant, but we are probably the only gourmet premium grocery retailer in the country now. So it operates in a very different space. In the grocery sector, I mean when it comes to Spencer's, we do compete with certain others. But I think Natures Basket has no direct competition so far given the positioning and where we are. And then your second part of the question, how does it -- how does e-commerce or quick commerce, I think, look, given the nature and the positioning of Natures Basket, it's a very high experiential-led format. So it is not that people who want to go and experience and buy different cheese, they will order on BigBasket or quick commerce. I mean this is a very store experience-led format. And we believe that's what the strength is. Now having said that, there will be plans to strengthen and build the online part of Natures Basket as well. But in a typical consumer psyche, I would expect that the customer adoption and I would say, loyalty will stem from visiting and experiencing the Natures Basket store. And the online part of it will be of your convenience of follow-up purchases. So that's how that segment will operate. So I would not go as far as saying it is insulated from the intensity of quick commerce, but Natures Basket given its positioning and assortment and the price points which it carries, so far does not have competition and in that space, direct competition and is less impacted by quick commerce.

All it will be right. So it will be right to say that you're also catering to a different customer set than what the general quick commerce caters to?.

Yes. I think it's a different consumer need state which you cater. I don't think we should say it's a different consumer because the same consumer has different need state. You might want to buy premium gourmet stuff 2, 3 times a month when you have a special occasion, you're making something. And on a top up, you're buying your atta, dal, chawal either on quick commerce or on visiting a grocery store. So, yes, it's different lead space which you kind of cater to. And Natures Basket is clearly positioned towards the premium gourmet grocery retail needs of a consumer in the large metros, so large concentration in Bombay.

And the next question is from the line of Yash Bajaj from Lucky Investment Managers.

Sir, my question was around, health care. So, just wanted to get a sense...

Sorry, we didn't lost you. Your question was around what?

Nature's Basket.

Yes.

I just wanted to understand the kind of parameters we look at before opening a Natures Basket store when it comes to -- comes in terms of locality of the customer profile or any other retailing stores which are around?

Well, I think it's besides the standard parameters which you look at in grocery retail. Obviously, the one which is most important is, I would say, the affluence of the catchment area. And obviously, then looking at the affluence, and therefore, the affluence determines the propensity to spend on categories which we keep. So clearly, I mean, the single biggest, I would say, criteria would be the affluence. Of course, we also look at the density of population and where it is. And yes, I mean, those are the ones besides the standard, location, accessibility, et cetera. But the differentiating factor is looking at the catchment area, demographics more from an affluence and income point of view.

And sir, just a follow-up to this, is that we currently -- when it comes to gourmet retailing, we compete with the standalone 1 or 2 mom-and-pop stores that's how it is?

Sorry? The -- you're saying that the competition from Natures Basket from stand-alone? Yes. Look, I think, I mean, don't take me literally when I said it has no competition. In India, there's competition for everything. What I'm saying is that there is organized on scale. There is no one retailer today who has a premium gourmet luxury retail kind of an offer. Yes, you do have in localities, you have your established kirana store, who stock either a wide variety of imported goods or you'll find they will have 1 good selection of exotic fruit. So you will have that. But I think on an organized branded level, we do have, I would say, the uniqueness and differentiation of being the one which is there. But yes, in pockets, I mean, if you look at Bombay, South Bombay, I'm sure in every locality like Nepean Sea, Worli, wherever you go, Colaba, you will have those kirana stores, which will have a good assortment of imported, somebody will have a good assortment of exotic fruits which they get. But, yes, not on a standardized, organized way as the branded chain, we are right now the only one. Yes..

And just my last question. So I mean Natures Basket caters to the luxury segment of groceries. So if I look at the other categories, when it comes to consumption, look at premium cars or watches or apparel, they are -- the kind of growth rates we are seeing there is relatively higher versus the Natures' Basket growth rate. So how should we look at this? How should we reconcile this?

Well, look, I think comparing luxury cars or, let's say, any other thing with premium grocery, you might not get a like-to-like index. You would buy a luxury car once in 3 years. But if you go and buy grocery, you buy grocery, probably 3 to 4 times a month. So I think -- yes, I mean, it's not comparable, but one has to look at it more from a point of view, is there a sizable market? And is there a growing category of people who are willing to either try premium price products, pay for it. I think that's how you will have to look at it. So it's not a like-for-like. If luxury cars grew 1 year by 20% and Natures Basket grew by 10%, I don't know whether we can draw a conclusion that it is underperforming for the position. I think the fact is that both are -- growth in both are an indicator that the Indian consumer has greater, not just liquidity and consumption power, but it's also going out and putting their money where their mouth is in terms of spending. So I think that's the way I would look at it. I would not draw comparisons between different luxury categories. That's the way I would look at it. But yes, I mean, both should move in the same direction. So double-digit growth in Natures Basket is something which corroborates the point that overall in the -- in that premium luxury space, there is growth.

And the next question is from the line of Nisarg Vakharia from NV Alpha Fund Management LLP.

You have entailed in your presentation that the benefits of the restructuring and cost-cutting exercise will be visible from quarter 1. My question is that you obviously have an MIS report of understanding which stores are unprofitable, like you have shutdown the South India stores. Will you stop burning cash by quarter 1 FY -- from next year of quarter 1 with the restructuring exercise that you have done because I think you've burned INR 40 crores, INR 45 crores of cash even in this quarter.

Yes. I mean, that's the ultimate goal. I can't give a forward-looking absolute guidance. But both the rightsizing and focusing on the stores is with the effort of making sure that all stores and as a network of stores are all store EBITDA positive.

No, sir, which year you will stop burning cash because last 3 years, I think INR 600 crores of debt has been piled on because of cash burn. So as investors, it's very important and pertinent for us to understand that when you will stop burning cash indicatively.

Yes. So I think that is exactly what we are doing in terms of exiting certain [ quick ] thing. If you want a specific thing, I mean obviously, the time frame which the management has taken is 18 to 24 month thing where we will...

Perfect. Okay. Second, sir, the most successful retailer, D-Mart, makes 8% margin because they don't -- because they own most of the properties. Now we are essentially in high-end malls where the rental costs are much higher as compared to likes of a D-Mart. So in your opinion, what should be the steady state EBITDA margin in our business in retail whenever the business turns around? What is your endeavor? Or what is your goal?

I think, we'll take it 1 step at a time. I think the first endeavor is to breakeven and then to look at what it is. So I think, yes, I mean, anywhere from a -- once we breakeven, and I've kind of given you a kind of a time frame which we are looking at doing that. I think anywhere from 6% to 8% is where we should be targeting. But right now, I think that's looking too much ahead. For us, the immediate priority is to breakeven.

And the next question is from the line of Akhil Parekh from Batlivala & Karani Securities India Private Limited.

My first question is, how do we balance the game between, say, wider -- keeping wider assortment versus being efficient in terms of inventory management. If I look at, say, global player like Costco, or in India, if you look at D-Mart, right? They don't leave enough choices for the customer in terms of the assortment. And that's why the sales throughput of asset terms are very high. While I understand our value proposition is different as compared to, say, D-Mart or other value retailers, so how do we find balance between these 2 things, basically, where we keep fewer assortments, and relatively okay assortment and at the same time, be efficient in terms of inventory lines.

I think it's a very good question. And I think that is one of the secret sauces if I would say, to manage a retail thing. The way it is done is it's a bit of a science and a bit of an art. I think the art part of it is you look at what your proposition and positioning is. And therefore, you need to give a minimal credible assortment. So if you are -- if your proposition is on value, then you have to have an assortment, which is giving deep value, and therefore, you're not really -- from a consumer point of view, you're not really projecting a width of assortment, you're giving value in whatever you're giving in the assortment. If our proposition is about you're giving multiple options or a range, then I think you -- optically, you have to give a certain level. Your minimal credible assortment would be slightly wider. That's the thing. The science part of it is that, look, even when you're giving a certain assortment based on your positioning, you have to constantly do what is called range effectiveness. So you have to -- the merchant's job is to figure out -- they know what part of the range is faster moving and the way the velocity is higher, and then kind of constantly keep trimming the tail. There is always a tail in the assortment. Even the most efficient retailer in the world will have a tail. I think the trick is, how quickly you respond and you prune the tail and you work on -- over a period of time on an assortment, which is quick moving. So yes, I mean, that's the key part of it. And given our positioning of a wide assortment, it makes that even more challenging, and that is where efficiencies have to be there. If we do that well, that translates into lower days on hand and therefore, higher inventory turns. And that's the operating metrics, which I'll be honest, we have not been very sharp at in the last few years, and that is what we will drive going forward in terms of looking at how are we forecasting, how are we building the assortment. And more importantly, how we are reacting every 30 days to do a range effectiveness and take corrective action. So it's a very good point, I mean that is one of the single biggest, I would say, levers of operational efficiencies in terms of what you're buying, what is selling, and therefore, what you're buying next and how are you kind of making sure that you're tight.

So are we only taking some of those steps? Do we have a technology stack in place, which should be able to kind of help us in fine tuning the inventory.

Yes. So look, this is -- like I said, this is -- we are working right now on what is a predictive model. So you kind of feed in what your sales has been. And therefore, what your pipeline for next month has to have that. At some point of time, yes, you're right, with the kind of machine learning and analytics tools, which are there, we can build that. But to be honest, right now, we don't have -- we're not running to any AI or machine program, which kind of tells you exactly what you should be buying. What we do is, we do an analysis of what we have sold and then we look into the buy and then we keep doing that. So we call it the SNOP plan. And the kind of measure what the sell-through was from the previous month and the previous months and we look at trends and then we, therefore, factor the pipeline for the next month. So right now, it does not have all of that high-tech AI machine learning built into it. But definitely, that's an area which we will keep looking into and how do we sharpen our analytics around supply chain planning.

Second, on the sales per square feet, right? I mean given that our store addition will be relatively on a restrictive side or limited this thing. So obviously, I'm assuming that our endeavor would be to increase the sales throughput. if I look at our sales per square foot, is roughly at around 17,000 to 18,000 square feet. And pardon me for comparing with D-Mart, which may not necessarily be a right [indiscernible], but they are almost at 2x of what we do. So any specific measures we are taking in terms of improving the sales per square feet mainly on the Spencer's side?

Yes. So I think again, on Spencer's, definitely, if you look at our SPSF, sales per square foot, it's not -- forget about comparison with D-Mart, it is not what it also used to be 2, 3 years ago. And I think the endeavor to -- or the decision to exit some of these stores or regions was because they were like far lower and there was a drag on the SPSF as well. Today, while we don't call out numbers on SPSF, but I'll take the liberty of maybe things. Look, we are in excess of 1,250 SPSF per month. And again, the clear driver, operational driver is, what I say, how do we drive more from the same? So therefore, how do we take that number closer to 1,500, 1,550 per square foot per month, which is what we used to do in the past. So I mean, that, I think, should tell you that we are looking at that as a serious operating measure, and we will drive that. We have seen that in quarter 3, we have been able to deliver close to that and lift that up. And we will keep sustaining that and taking that. If we don't be bound by that 1,500 level, but we need to consistently deliver that. And therefore, it goes back to that. It's not about adding on stores and increasing our trading area. It is also driving the ability to get higher productivity and higher SPSF from the same stores. And that's what we are focusing on, and we will improve that metrics.

Sure. Just to clarify, the decline in sales per square foot, which we had from past, was largely because of the increase in denominator, that is as a square feet increase basically, not because of the change in the product. Is that correct?

Not really. I mean it was also the top line was -- had not grown. So it was a combination of that.

The next question is from the line of Rakshit Sethi from Fair Value Capital.

Start off with, I wanted to thank you guys for having this analyst call. This is a pleasant change, and I hope this will be a regular feature, and we'll get to interact with you all on a quarterly basis going forward. Having said that, to follow up on the last analyst's comments. You were very rightly pointing out that the assortments in the store depends on what the value proposition is. And so my first question would be with regards to Spencer's Retail. We've been watching the company for the last 5, 6 years, what is our -- where do we want to position Spencer's Retail? And I ask this because there have been a number of experiments. So in terms of size of the format, we have lately seen a couple of Spencer's Kiranas having popped up as well. There used to be Natures Basket that was converted into Spencer's Kirana. So going forward, when we are looking at adding, say, 1 million square feet a year, where in terms of format, and in terms of positioning value proposition, where are we focusing on? And what is the thought process that the management has behind that?

Thank you for that question. And I think just to think -- your question is very specific to what is the positioning value proposition for Spencer's, which tells me that there's no ambiguity on where the positioning and value proposition of Natures Basket is, which is...

I'll come to Natures Basket subsequently because anyway, we'll come to that later. But yes, first...

Look, I think on Spencer's if Spencer's has -- is.What we are clear is, we should also be clear on what we are not, and then we are clear on what we are. I think what we are not, we're not going to be a value discount retailer for a variety of reasons, and I'm not well on that. But in the past, we -- I'd be honest, I mean, you succumb to competitive -- not competitive, but you succumb to where the whole sector is going in terms of trying to follow that and not playing off your strength. So our strength will not be able to -- will not be that we will be drive a certain level of scale with a deep discount or value, where our inherent business model DNA and our strength is to be -- to offer the right assortment. When I say right, it's an assortment which has choices relevant, as well as which give a great shopping experience in-store. So that's something which you speak to consumers. Yes, they get value in a certain store but the whole shopping experience is very different in our stores. And there are, like I said, different consumers and the same consumer sometimes. Sometimes they're looking at value, sometimes they're looking at the whole shopping experience. So our proposition is very clearly on giving a wider assortment, more choices, actually. I would not divide assortment, more choices in category. So it's not just, staples, like I said, a differentiator in our assortment in the East are things like liquor, fish and meat. So you give the complete household grocery assortment and more choices within that. It's the experience. You have the right complementary nonfood mix. So again some correction there, what we need to do. And that's the positioning for Spencer's in the relevant areas.

So then how would you explain entry into, say Spencer's Kirana? And how would that translate into store sizes? What typically going forward would be the store size format that should be adding more?

Yes. So your -- second part of your question is, look, how -- what is Spencer's Kirana, Spencer's Hypermarket? So today, in our format, we have, let's say, 2 broad levels. We have the smaller stores, which are anywhere from 2,000 to 6,000 square feet. And then you have the hypers, which are anywhere from 10,000 going up to as big as 20,000. And our experience and the performance is shown depending on regions that we need to have a good mix of both. So we are not [ veering ] towards one and saying we'd only have hypers. The shopping mission is very different in kirana and in a hyper. Hyper size, the fact that it's located in maybe high street mall -- not high street but a mall, is more of a destination shopping experience, whereas kirana becomes more of a regular convenient top up kind of a grocery model. So, like I said, depending on the city we are in, we would like to have a good mix of a few large hyper formats, which gives a complete experience of what Spencer's is, the complete assortment, the width of assortment, the shopping thing. And then that's complemented by, in the same city, you have a network of small stores, which are meant for your convenient top-up shopping trips over there. So just to take an example, and again, I would not just say Calcutta. Even if you take a city like Siliguri, right, which is in North Bengal, we have 6 stores, 5 stores, and we have 2 large stores, which gives the complete thing. And then we have stores which are 5,000 square feet, and we have a store which is 3,000 square feet. So I think it's a mix of both of them. Going forward, yes, I mean, we also have to see the costs involved, the rising rental cost, high street location. We would -- if you are deepening our presence in a city, we would look at sizes which are more, I would say, the sweet spot would be 8,000 square feet. But if you're entering a new city, which actually we are not going to do in the next 12 months. If you were to enter a new city to establish the whole Spencer's experience and proposition, you would need to have a combination of a large store as well. So, yes, I mean, the strategy for me, it's not an or, it's an and. We need to have both. But we need to be very clear of going forward, depending on the city, are we going to add more large stores? Are we going to do more [ 8-10 ]. I think in existing cities where we already have a footprint, we will see a lot more of the 8,000 to 10,000 square feet kind of stores, which can give the complete food assortment...

Very reassuring to hear because as someone who's based out of New Delhi, one, say, in East, the brand is established. It stands for experiential retail. If you're already established as a brand and then you launch a smaller plate size store, then it transcends, right? The eventual customer appreciates what's happening. When you enter Delhi, and you start up with a Spencer's Kirana, Delhi I can't experience to what a Spencer Hypermarket is like. So it dilutes the whole brand of Spencer's for an entire market like Delhi. And that was a big concern, but I'm glad that, that clarity is there, that can have a negative impact. When you enter a new city and you don't enter with the actual thing that you stand for?

Yes. Yes. So you're right. I mean you have to establish the brand experience through a representative format. And when you want to penetrate deeper in that city, then you have to have the small stores. You can't launch in a new city, that's what I said with a small format, which does not give the -- establish the whole experience. So that's what we've learned.

I'm very surprised to see that Spencer's Kirana. Now coming to Natures Basket, again we had been giving this feedback to the earlier CEO. It's good to see that it appears that you are now also trying to look at the space that has completely been vacated by food hall. Earlier, if I would give or take, our store formats were similar to, say, a modern Bazar or Le Marche. So my question would be that going forward, a, how many -- what is the addition -- store additions that you are going to be looking at? And in terms of, again, plate size, are we going to be looking at more food hall like large format with the Artisan Pantry or smaller plates?

Yes. So look, like we said, Natures Basket would be looking at somewhere between 40,000 to 50,000 square feet additional coming in next year. It will be focused in the cities where we are, what I call the mega metros. So Bombay, where we have a good density. Looking at -- we've just opened -- in this quarter, we opened 1 more store in Calcutta. So it will be Bombay, Bangalore, which will be the focus. From a plate size or from a what is the format? We've -- like I said, we launched Artisan Pantry in Bombay. We've launched 1 more. So it will be a combination of the Artisan Pantry, which I would say would become a flagship in a city plus the regular Natures Basket. So it will be a combination of both. But we are not looking at new cities, no further expansion in new cities at the moment. We believe there is enough headroom in these existing cities to put -- launch a few more stores.

And especially given the fact that food hall is completely backed up, I mean, that's a clear runway, right? But there is no one who's there taking that space at all completely right now. So again, I know it's -- someone asked this earlier, I'm going to take a chance and ask again. For both formats, first for Natures Basket, by when do we see PBT like throwing out cash? And Spencer's, you said 18 to 24 months. Are we going to stick to that for cash burn ending?

So look, again, I don't want to give a specific time line. But look, I said that is the clear task on hand for the management. And we've already started the journey in some small measures, 1 quarter is showing a path. The path to profitability will be shorter and quicker for Natures Basket and then not too distant for Spencer's. So yes, I mean operating in the same time frame of 18 to 24 months at a consolidated level. we should be kind of on track to do that. Of course, it's not going to be easy, but that's what we all signed up for, and that's what we are charging up the team and committing to deliver. But yes, I mean, Natures Basket would be sooner than what Spencer's was.

Great. I hope, like I started the call with, we'll have these interactions more regularly going forward.

Oh no, absolutely. I mean I think it is my first one, but I can reassure you, this will not be the last, and we will do it at a more periodic basis and a more regular basis.

And the next question is from the line of Tushar Sarda from Athena Investments.

There have been a lot of questions on reaching profitability. I wanted to know what is rent as a percentage of your sales in Spencer's and in Natures Basket separately?

Look, I think we don't call out that number, but I mean, you can gauge it from the operating spend, but rent, as a thing is more ballpark in the region of 5% to 6%.

So to reach profitability, your gross margin in Spencer's will have to increase from 15%, which you're reporting now? What do you think it will need to go to?

But actually, I would like to correct Spencer's margins are 19%. So I mean, it's not 15%.

So I deducted -- from the reported numbers, I deducted Natures Basket, then I arrived at 15% from the consol numbers. So Natures basket seems to be 29% and Spencer's seems to be 15%. Is that not right?

No. I think for the December quarter, Spencer's at 18.9% to be precise, which is a slight improvement from December of last year, which was at 18.8%. So we will strive to keep that as the level and Natures Basket is at 29.6%.

Okay. So that's 18.9% is gross, right?

Yes.

No, for the consol, right? Not for Spencer's standalone?

No, that's for Spencer's. So you were saying 15% for Spencer's, and I said, no, it's 18.9% for Spencer's and 29.6% for Natures basket. And at a consolidated level, the margins are 20.3%.

And my second question was on how scalable is Natures Basket business if we take a, say, longer-term view, say, 5-year kind of a view. What do you see the opportunity as?

Yes. So look, there is, like I said, the exact number, we are in the cycle of a 3-year AOP, which we'll put together. But like somebody else had asked the question and they were saying that the growth in luxury segment is much higher. There is headroom for growth. The previous person asked the question saying that now with food hall thing, you have a clear runway. I think these are all kind of indicators that there is headroom to growth. We've got the operating model on Natures Basket with the margins, and we, therefore, will be committed to scaling it up. And there is enough opportunity to scale it up.

You have 33 stores now. In 5 years, what can this -- I mean, in terms of opportunity in the market, what is the size that is possible? I mean, I just want a rough idea of the market, right? Like when you talk to a pizza guy, 2,000 stores, 3,000 stores. So here, what do you think you can go to 100 stores, 200 stores in 5, 6 years time?

I think, look, if -- again, it's a forward-looking one. I would say, if you look at the trajectory of growth as far as the economy is concerned, premiumization, which is happening to say that in 5 years from now is, can the market take 150 of these format stores? Absolutely. So I would more answer from a category size. Yes, the market in 5 years could be [indiscernible]. Absolutely, yes. Absolutely.

I'm asking about category size and you're the only player. So this will dominate the category. So from that point of...

I think from a category point of view, this is a category where it is only going to get bigger as income expands in urban cities in large metros. And it's not just large metros. In 5 years from now, I mean, we could see the same thing in other large cities as well, whether it be a Pune or it be in Ahmedabad. So, yes, there is -- I think the whole category will grow. It's a function of how we tap into that and how we scale up. But 5 years from now in India for a format, which is premium gourmet retailer to have 200 stores, absolutely, kind of, it doesn't sound like a wild number.

Okay. And currently, what do you think is the size possible in a city like Bombay or Delhi for this format. I'm again asking for category, not necessarily for you, but how many stores as of now, Bombay or Delhi can take of this format?

Yes. Look, again, like I said, Bombay, we have close to -- we have 22 stores, right? Now a city like Bombay for a format like this, could easily probably take, I would say, 30, 35 stores. Besides Bombay, we also have cities like Bangalore, which is, again, a very big concentration of consumers who will resonate with this proposition, very well spread out. We have 8 stores there. As a category, I mean, Bangalore could also take, I would say, 15, 16 stores. So yes, there is -- again, it all keeps going back to the fact that I'd say that, look, there is headroom and there is -- this category will only grow. And that is going to be influenced by not just rising incomes, but more affluent lifestyle, people -- the propensity for people to consume and to kind of experiment with a lot of international cuisines. So I think yes, there is headroom for growth over here. Each of these cities can take stores.

So which means you are under-penetrated currently, right? I mean if you're saying Bombay itself has so much potential, if you consider cities like Delhi and Calcutta, Chennai, Hyderabad, the potential is a lot more even currently.

Well, I mean, if you're saying that we have 22 stores in Mumbai. So again, I don't know where you're trying to pin me, but it's 22 stores, you said what is the outlook? I said Bombay could take 30, now 22 out of 30 is not really underpenetrated. I the point is, are there more cities like Bombay.

No, underpenetrated in the sense, you are not there in Delhi, for example, or Hyderabad or Chennai. So from that point of view. What I want to say is, can you grow much faster in Natures Basket?

I think it's -- again, it's -- can we grow -- I mean you started with what is the size of the category in 5 years? And I said actually, we can look at -- as a category, we can look at 200. In terms of cities, 1 specific city which you talked about is Bombay. So I gave you a number. Similarly, Bangalore, yes, has a potential. Delhi, of course, has a potential. But it's a question of how much we want to resource and build. I think we are saying that we want to first do it in Bombay and Bangalore. And then, of course, yes, we will then expand into other cities as well. We'll evaluate it. So at the moment yes.

On behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Thank you so much for being here. Thank you very much for all the questions and the participants and hope to connect with you on an ongoing basis.