There are four different types of ‘supermarkets’ — that rather antiquated yet comforting term in the era of specialised retail formats — within walking distance in the seaside and upmarket neighbourhood of Besant Nagar in southern Chennai. There’s a mom-and-pop store that recently, and reluctantly, relaunched with cramped, air-conditioned aisles (another downed shutters over a year ago). There’s a government-run co-operative where the prices are as unbeatable as the indifferent service. There’s big boy Spencer’s with its perpetual discount boards. And then, there’s Nilgiri’s, which is none of the above. Still, should there be a local popularity poll, it looks like Nilgiri’s would win by miles. Regulars ignore the parking troubles, they know the house brand of breads will run out by end of day and almost certainly early on weekend evenings, home-delivery is underplayed, the pricing is unapologetically premium and there are never any discounts on the MRP, ever.
Surviving for more than a century in the pernickety business of retail makes for a doughty brand, and at this and 129 other branches across 15 cities in the South, mainly in Karnataka and Tamil Nadu, it’s easy to see why the ₹650-crore Nilgiri’s has been thriving since 1905. It started as Nilgiri’s Dairy Farm, a butter business that Muthuswamy Mudaliar, a mail runner for the British Government, bought from an Englishman in Vannarpet, Ooty. In 1936, Mudaliar launched his first store in Bangalore on Brigade Road. It was his son Chenniappan’s visit to Europe and the US that led to the unique Nilgiri’s supermarket format in 1945 that sold its own dairy and bakery products in addition to other brands.
It was customer service that kept the brand alive till 2006, when UK-based PE fund Actis bought a controlling stake of 66% for an undisclosed sum, revamping its supply chain and pushing for profitable store expansion. “Nilgiri’s is probably the most profitable food and grocery retailer in India now. Unlike many other retailers in India, we have been consistently profitable for quite a while now,” says Shomik Mukherjee, partner, consumer sector at Actis.
Nilgiri’s operates through the franchise route with 80%, or 103 outlets run by franchisees. It averages sales of ₹2,000 per sq ft per store monthly, that’s around ₹20 lakh for a 1,000 sq ft store and almost twice that of its nearest competitor by Nilgiri’s CEO Murali Krishnan’s estimates. In fact, its three recently opened stores at Navalur, Thoraipakkam and Padur on Chennai’s IT corridor, Old Mahabalipuram Road — a hot destination for home developers in the last five-eight years that still lacks the sort of upscale neighbourhoods its cosmopolitan residents expect — have already seen sales of ₹3,500 per sq ft. Here, the demographic changes from the conservative city shopper to a yuppie crowd that “freaks out on frozen and exotic foods, which is why we have more and more vertical freezers coming up in all our stores,” says Murali Krishnan, who’s been with the chain since 2009.
Product innovation and a focus on health have kept the brand relevant to customers. Its recently launched cold-pressed gingelly (sesame) oil is a first in the market and outside its core competency of bakery and dairy products. “Similarly, we have launched sugar-free flaxseed, jamun and dalia cookies, fruit yoghurts with exotic berries, probiotic curd, flavoured lassis and a carry-to-work-and-add-milk porridge,” Krishnan adds.
Old strengths, new strengths
Nilgiri’s, with its farmer-base of 5,000 milk suppliers, some of them in relationships that are now over three decades old, has its freshness quotient nailed to the last wedge of its famous butter. The company’s three verticals are its franchisee business, general trade bakery that supplies baked goods to mom-and-pop stores, and general trade dairy. Staples is the fastest growing segment in the franchisee outlets while dairy is the biggest volume and value segment for the company.
The bakery division operates out of a large manufacturing facility in Bengaluru, where orders pour in from all stores by 11 am. These are baked and despatched by 7 pm for sale following morning in Hyderabad, Chennai, Bengaluru and Thiruvananthapuram. “We truly believe freshness is our mainstay,” says Krishnan. It’s the same with packaged foods: a pack of chips at a Nilgiri’s store is not likely to be more than a month old, regardless of its shelf life as the chain eschews deep discounts on bulk supplies for smaller quantities to enable fresh turnover in food products. Nevertheless, the legendary bakery division needs a revamp, Krishnan admits, as people have now started going to upscale standalone bakeries with fresh cream offerings instead of the traditional butter cream that Nilgiri’s still uses.
Private labels is another area where it goes against the grain in the trade. Modern retailers typically pitch their own brands as more affordable alternatives to manufacturer brands. At Nilgiri’s, though, its dals, grains, dry fruits, flours and spices are sold at a premium of around 20% over the nearest competitors. “Food is the differentiator in supermarkets and it is our strength,” says Krishnan. “Our private label in foods is our footfall driver — 68% of our sales comes from food. And since we are private label players in only food, the actual share of our home brand in total sales is nearly 30%.”
Long tail logic
The other aspect defining Nilgiri’s is its long tail. Most ‘supermarkets’ have 1,000-2,000 sq ft of space to offer, typically averaging between two sizes, and all their shelves are fully stocked. What, then, is the differentiator for Nilgiri’s? “It’s that they [the competitors] keep more of the same things and we keep a much larger range,” explains Krishnan, adding that Nilgiri’s averages net margins of 14-15% across segments, at the company level. “We don’t stock up for higher margins because some supplier is offering them to us. We offer a wider, more efficient inventory from the buyer’s perspective.”
There are two ways in which a supermarket can use its space: stock more of the same or stock less of a larger variety. Nilgiri’s opts for the latter and its consumers come looking for that range of ‘everything you want’, not discounts. “The franchisee plays a crucial role in managing this vast inventory and the success of a store depends on the degree of his involvement,” says Krishnan. Modern retailers typically operate out of large, centralised warehouses and ship out preset quantities from a catalogue of about 2,000-2,500 SKUs (stock keeping units) sourced from suppliers offering the deepest discounts. This leaves franchisees with limited flexibility in stocking at the store level. It’s also the reason why in most modern retail stores, 20% of SKUs, typically in staples like atta, sugar, rice and washing powder, fetch 80% of revenues with wafer-thin margins.
Nilgiri’s turns that system on its head by doing away with a centralised warehouse and facilitating direct deliveries from a much larger database of suppliers, leaving the what, when and how much to the franchisees. It’s far more problematic to manage such a long tail in the supply chain but the customer is delighted to find powdered flax seed, a ₹5-packet of ajinomoto, or fresh yeast, palm jaggery and hill garlic, all under one roof. “Nobody can match our inventory,” claims Krishnan. “Even if a customer wants cherry tomatoes, he may not have it the same day but he will have it on the next. It’s a complex business and the customer has an opinion. They will simply ask: ‘but why can’t you keep this?’ Naturally, they cannot be expected to realise what goes into the logistics of keeping that one thing.”
Generally, ‘supermarkets’ stock 1,500-2,000 SKUs in a 1,000 sq ft store, which means one or two SKUs for every sq ft of retail space. Nilgiri’s does four-five SKUs per sq ft in its stores, which translates into four times more product range on offer. This is done keeping in mind customer preferences in every store catchment — aapam in Kerala, ragi dosa in Karnataka, frozen foods for Christian communities — although 80-85% of the inventory is common across a region.
A retail brand this old comes with a strong pull, and the opening of a new store usually sees throngs of customers there just to check things out with nostalgic memories of childhood shopping experiences. “Nowhere is the consumer connect as strong as it is in food retail,” says Krishnan. This connect and local knowledge are proving useful in new destinations such as Kerala, considered a tough market with thin margins. “It wasn’t easy, but in seven months, after some initial struggles, we are the number one store in Thiruvananthapuram, and the knowledge of our Malayalee customers in Tamil Nadu and Karnataka has helped us.”
There are 30 new stores planned over the next one year. While Tamil Nadu is well-represented, especially Chennai, there’s plenty of room to grow in Karnataka and Kerala. Nilgiri’s plans to enter nine new cities this year, and smaller towns like Vellore and Trichy will be the focus now, says Actis’ Mukherjee. “We would like to take it to the next level by moving to towns outside the main metros.” Commercial space is a big challenge. Getting a good franchisee is the other as the entire dynamics of store and inventory management leads to massive back-end work and demands deep personal involvement.
It costs ₹45-70 lakh to set up a modern food and grocery outlet, depending on the location. The franchisee is given flexibility and control over inventory, which is delivered by a centralised list of suppliers at margins that are 3-4% higher than what standalone stores would get from the same suppliers. Breakeven happens as early as the third week — the new stores on Old Mahabalipuram Road did it in 10 days. This model will now be put to test in small towns, but Krishnan is confident that the over 108-year-old brand will pass muster.
Much of this confidence stems from the changes that Actis helped bring about after coming in, seven years ago. This included hiving off some real estate, professionalising operations, smoothening a worn-out supply chain, and making course corrections such as disbanding the master-franchisee concept, even as the family consolidated several fractious and small shareholdings. “We had a few stores that were doing very well, and a lot of stores that were doing badly,” says Krishnan. “We had to understand what the consumer wanted — franchisees are front-end focused whereas we still had to get our back-end processes right. We found that we weren’t well-represented in terms of location or range of foods, all of which we fixed with a lot of trial and error. After six months of rigorous focus, we began to improve and reposition our brand, including our tagline — ‘at the heart of good taste since 1905’.” This was just what the iconic, yet fading, brand needed in a new retail context. It remains to be seen if, like the mountains it’s evidently named after, Nilgiri’s can stand tall in the times to come.