From dairy, agri and bakery to a chain of 80 food and grocery retail stores, the Heritage Group has diversified business operations. Jagdish Krishnan, COO, Heritage Retail and Bakery Divisions, talks about their food and grocery retail arm Heritage Fresh and it’s strong brand positioning and ongoing expansion, with INNLIVE. Here are the edited excerpts:
Please give a brief background of the Heritage Group.
The Heritage Group was founded in 1992 by Nara Chandra Babu Naidu, the president of Telugu Desam Party and chief minister of Andhra Pradesh. Initially, Heritage was a well established dairy brand in South India. When it began to consider expanding and diversifying its business interests, one of the avenues it looked at was food and grocery. In fact, the idea of getting into food and grocery retail business, especially of fresh produce, evolved as an extension of the relationship the company shared with the farming community.
The food and grocery retail arm was set up under the Heritage Fresh brand name under Heritage Foods in November 2006, and as the name suggests the company procures and retails farm fresh fruits and vegetable directly from farmers. Today, under Heritage Fresh, the Group operates a chain of 100 stores in major cities of South India. These include Hyderabad (50 stores), Chennai (25 stores), and Bengaluru (13 stores). The store sizes vary between 2,500 sqft and 10,000 sqft. Currently, we are trading within a total retail space of 3 lakh sqft.
At present, the group has five business divisions under Heritage Foods Ltd. These include dairy, retail, agri, bakery and renewable energy. Heritage milk products have a strong market presence in Andhra Pradesh,Telangana, Karnataka, Kerala, Tamil Nadu, Maharastra, Odisha and Delhi. Its integrated agri operations span across Chittoor and Medak districts. Our agri business in the related sourcing belts is the backbone of our retail and bakery divisions.
In India, fresh fruit and vegetable retailing is largely unorganised. Vendors procure fresh produce from wholesale mandis and sell through small roadside shops or pushcarts. Besides, there are local weekly bazaars that spring up in various localities. Our food and grocery retail business focusses on organised retailing of fresh produce. Pure organised F&V retail such as ours is still niche, and there are not many players in it. It is a challenging business as it takes time and patience to understand and sustain business in this category as one is dealing with products that have only 1 or 2 days of shelf life.
What is the merchandise mix and important categories at Heritage Fresh?
Our stores offer 7,000 to 15,000 SKUs depending upon the store size and catchment needs. We have planned our space allocation in the stores based on store positioning, and category preference in the respective catchment; irrespective of whether they are national or regional brands. Our private labels occupy about 15 to 20 percent space. Imported products form a small part of the store sales, with only 1-2 percent of shelf space allocated to them.
We have an edge over other retailers in the fresh produce and dairy segments, and the two categories contribute one-third of the revenue of our total sales. Essential grocery items contribute around 20 percent to the sales, and the rest comprise of other food and non-food FMCG products.
Our wide range of fresh fruits and vegetables are directly sourced from the farmers and transported to the stores through our integrated cold chain. Under our in-house brand Farmers Pride, we offer a full range of high quality staples at the most competitive prices.
What are the key factors for developing a private label?
The first and most important is the viability of a private label in the scale in which you operate. Other factors are size and margin attractiveness of the category. The retailer must factor in his brand presence and strength, technical entry barriers, and be able to identify competent private label manufacturers. Under our private labels we offer 250 SKUs in the food, grocery and non-food consumer products. We offer three in-store brands, Heritage for dairy products, Farmers Pride for staples and Blossom for non food products.
What are the front- and back-end efficiencies at Heritage Fresh?
We have distribution centers and re-packing facilities for staples in all the three cities that we operate in. These distribution centres receive FMCG goods from vendors; fresh produce is sourced from our two fruit and vegetable (F&V) pack houses, and for dairy products we have distribution points that are closer to these cities.
Currently, we have two agri pack houses: one in Shantipuram area of Chitoor district (3-5 hours drive from Bengaluru and Chennai), and the other is in Hyderabad. These F&V pack houses are managed by our agri business vertical, which not only supplies to our retail stores, but also to several other modern retailers in the region. At these pack houses there are cleaning and grading units, long and short cold storages, ripening chambers, and packaging facilities. About 200 metric tonnes of fruits and vegetables are processed daily here. Freshly harvested fruits and vegetables are cleaned, graded and transported to our retail distribution centers at night, which are then re-distributed to the retail stores in each city early in the morning, and are available for consumers by 7 am.
We have invested in IT systems and processes to manage many of the front- and back-end operations. We started our operations with retail specific JDA ERP package and subsequently moved on to the SAP environment. At the front-end, our point-of-sale is managed through the Polaris RXL software, which is integrated with our back-end SAP ERP system. All our stores and distribution centers are connected with VPN for seamless date exchange. All operational, product categories, and supply chain management decisions are data dependent. Live and accurate decision support system through the ERP helps us take timely decisions and improve the overall efficiency of the business.
The front-end is managed by the store staff and on an average we have one person for every 200 – 250 sqft area in each store. The number of staff at the store level depends on its size and the footfall it gets.
What are the major operational challenges in the retail business?
It’s a highly competitive business as it is volume centric and has relatively low margins. Getting viable store locations, skilled manpower, managing perishables like fresh produce, and deterring pilferage, are the important challenges. We have to factor in major overheads such as rent and energy costs, and also ensure capability in managing sourcing, warehousing, logistics and other administrative issues efficiently in each of our offices and retail outlets.
Opening a new store is a major challenge; it generally takes about 4 weeks to open one. It involves finding the right location based on a thorough study of the catchment, competitors in the neighbourhood, calculating expected sales, factoring in overheads, finding sales staff, etc, in short, gauging the financial feasibility of project. On an average, Rs 1,000 to 1,500 per sqft is invested in a store, so the amount required would depend on the store size. Then we are required to deposit store rent for 10 months, which is about Rs 650 per sqft and around Rs 1,250 per sqft is invested in inventory for a month.
What are the future plans of Heritage Fresh?
On an average, we are opening two new stores every month mainly in Hyderabad, Bengaluru and Chennai. All of these will be company-owned. In the next three years we expect to increase our retail trading space to 6 lakh sqft from the current 3 lakh sqft. Last year, we clocked a turnover of Rs 377.9 crore, and have been growing on same store levels by 8-10 percent. With our new stores we expect to reach around Rs 1000 crore of turnover by the end of the current fiscal year.
Heritage Fresh Supermarket: From Farm to Fork
With its primary focus on ‘fresh’ perishable products, the Heritage Fresh retail chain follows the farm to fork model. Jagadish Krishnan, Chief Operating Officer - Retail and Bakery Divisions, Heritage Foods Limited, delves into the company’s growth over the past seven years.
Hyderabad-based retail chain, Heritage Fresh currently has 70 stores with a strong presence in Hyderabad, Chennai and Bangalore. Its parent company, The Heritage Group, was founded by Shri Nara Chandra Babu Naidu with an aim to delight customers with ‘fresh and healthy’ food products.
Heritage Fresh was launched in November 2006, initially under the brand name Fresh@; the first set of pilot stores opened in Hyderabad. After going through several changes in the business model that aimed primarily on the perishable category (which now accounts for one-third of the company’s sales), the retail chain was renamed as Heritage Fresh. Today, Heritage Fresh is a modern supermarket stocking about 7,000 SKUs, with its core strength coming from perishable products such as dairy, fruits and vegetables. Explains Jagadish Krishnan, COO, Retail and Bakery Divisions, “We have made significant back-end investments in the perishable categories. Till date, we have invested about Rs 300 cr in our retail business.”
Heritage Fresh clocked a turnover of Rs 7 cr in FY 2006-2007 and in FY 2012-2013, it registered a turnover of Rs 327 cr. The company is expecting a revenue of Rs 400 crore by the end of FY 2014.
The retail chain’s operations and warehouses are spread across Hyderabad, Bangalore and Chennai. Its cumulative warehouse area covers 1.4 lakh sqft,and stocks about 6,000 skus and 7 days of inventory.
The farm to fork model is a ‘Relationship Farming’ engagement model that promotes growth for the farmers by giving them inputs and work alongside to improve their farm productivity. The farmers’ produce is bought at a fair prevailing market rate and they are free to sell to Heritage Fresh or to any other retailer. Heritage Fresh has also set up two ultra modern Pack Houses with an investment of around Rs 35 cr that includes all modern facilities like grading lines, pre–cooling chambers, fruit ripening chambers, cold storages with a processing capacity of 300 metric tonnes per day. These are located strategically to serve the retail chain’s presence in Hyderabad, Bangalore and Chennai.
The Heritage Fresh retail business came with several internal challenges such getting viable, commercially approved locations to scale up business, quality of human resources at leadership level with retail understanding, business remodelling issues keeping in view the margin and cost structure, process refinement issues to arrest shrinkage and margin leaks and scarcity of trained staff to man the stores.
According to Krishnan, over the last decade, grocers have been working on understanding and fine tuning their business models to the requirement and of their local population and to find solutions to the issues.
Positioned on the ‘Fresh’ platform, a significant part of the retail chain’s sales come from fresh produce. All Heritage Fresh stores open at 6.30 am for customers who want to shop for dairy, fruits and vegetables early in the morning at a fair deal.
Heritage Fresh presently has about 2.3 lakh square feet of trading space and is planning to increase it to 6 lakh square feet in the next 3 years. As per the company’s plans, New Heritage MART format 15,000 square feet stores will be launched in the next two quarters.
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