METRO’s success lies in its superlative store economics. Operating in the premium Footwear space, through its own retail network (COCO) is imperative to achieve a successful store-level profitability to garner scale. Its ability to run an efficient retail network, led by its superlative productivity of ₹25,000/sq. ft. and store-level EBITDA margin of 25% has translated into a superior payback period of below two years.
METRO has consistently added new stores (12% CAGR) over the last six years across its four brands and achieved an EBITDA margin of >21% (pre-Ind AS 116). This underlines its sustainable growth capabilities. Yet, its store count is one third the size of BATA, underscoring the opportunity to expand store count.
METROs have a strong annual cash flow generation (of ₹3b- ₹5b can potentially fund more than 250 stores), management intent to boost its footprint by double-digits, and robust store economics, and last 10-years’ history of consistent store additions gives us enough confidence in its ability to drive growth.
It is imperative to build a successful EBO model (achieve store level profitability) to scale up a premium Footwear business. METRO’s revenue productivity is among the best in the industry ( ₹25,000/sq. ft.), with an average realization rate of ₹1,400. This has allowed it to garner healthy store economics. METRO’s ability to run an efficient EBO network, led by its superlative productivity of ₹25,000/sq. ft. and store-level EBITDA margin of >25% has translated into a superior payback period of merely below two years.
Factors like the right store size, including the use of the mezzanine/loft space for storage, wide product basket catering to the family audience, prioritizing revenue optimization over cost (high staff incentives and top store locations) allow it to garner healthy store economics. This, in turn, gives legs to its growth initiatives.
Store-level capex – It spends ~ ₹4-5m towards capex, ~ ₹5-7m towards inventory, and an additional ₹1m towards security deposit. Total capex is ₹11-12m.
Format-wise store set-up cost
It generates a store-level revenue of ₹22m, i.e., 2.8x asset turnover, with a realization of ~ ₹1,400 and annual store volumes of 16k pieces.
Company focuses on building an asset-light model that operates via leased stores and aims to turn profitable from the first year itself. The management believes that if a retail store loses money in the first year itself, it is a challenge to turn it around as costs go up every year. New store additions and capex
METRO’s store count has grown by 644 stores in 147 cities as of Jun’22 from 419 stores in FY18, a growth of >50%. Last year in RHP it had targeted to add 260 stores over the next few years. Since then, it has already added 34/15 stores at gross/net level. Assuming a capex of ₹5m per store, it will require ₹400m for the same which should be comfortably funded through internal accruals.
Metro/Mochi have 238/168 stores (as of Jun '22) against more than 1,600 stores for BATA, thus offering it huge growth opportunities. In the past, METRO has been opportunistic by adding stores aggressively during the benign Real Estate market and stepped off the pedal when the market was heated. It added 95 stores in FY19. Prior to that, store additions were in the 60 - 65 stores range.
METRO’s target customers
Targeting the Premium segment Operating at a price point of ~ ₹1,400, METRO targets the Mid- to Premium segment of the Footwear market, which is ~50% of the total market. These segments have a higher share in the organized market and are predominantly led by an EBO model, given the need to provide the customer:
a) a wide range of Premium products, and b) a good shopping experience. This is missing in a traditional MBO, which conventionally caters to the lower price point customer looking for value products and therefore limits inventory of premium products.
METRO’s ability to churn out a good design mix comes from a robust ecosystem of an in-house design team and vendors who are incentivized based on design acceptance. A pull model, which considers feedback from customers and retailers in deciding product shelf space; and Data Analytics to develop and launch margin-accretive in-house brands.
Change in trend
The market is shifting towards Casual wear and Active wear products as young consumers are increasingly moving towards branded and organized products. This got further accelerated due to the COVID-19 pandemic. The management is looking at expanding its Active wear portfolio. There have been improvements in its Casual wear portfolio over the last few years (pre-COVID) with the launch of new in-house SKUs.
METRO’s aspirational brand image, fashion-forward designs, and product range targets the Premium segment with over 35 brands across categories and occasions. Out of the four formats, both Mochi and Metro are premium and aspirational brands operating at similar price points ( ₹1,600). Metro is more of a family format, whereas Mochi is youthful with a higher fashion quotient. Its price range is much wider (from ₹1,000 to ₹10,000).
The focus is not to tilt significantly towards the Premium segment but remain in the affordable yet aspirational space.
The store merchandise is customized depending on different locations and regions like Mumbai or Tier II locations. This festival season and holidays coming Metro is all geared up with new fashion trends to reach your homes.
Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar
Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment relatedinvestment-related decision.