The Indian physical retail game is nothing short of a bloodbath, with multiple casualties over the last few years.
More was sold by Aditya Birla Group to Samara Capital and Amazon
Godrej got rid of Nature’s Basket by selling it to Spencer’s Retail
Future Retail is being taken to NCLT as lenders seek to cut their losses
Metro AG’s India operations have been up for grabs
Walmart and Carrefour have always found it difficult to set up shop in India
And while this space unfolds its dramatic fatalities, DMart continues to lead as a successful retail brand, rather steady in getting stronger while the industry bleeds;
From 176 stores in FY18 to 302 in 2QFY23, and
At a profitability of 8.6% (EBITDA margin) which is at levels seen pre-COVID, despite supply chain disruptions and commodity inflation
Let's break down its winning strategy and understand what it does right in the ultra-competitive field of organised retail.
1. Don’t Rent; Just Buy
DMart invests its money on assets that will serve as a springboard for future growth, going against the grain of the asset-light business strategy.
It is important to remember that after the 2008-09 financial crisis, the real estate market was in the dumps. Prices fell by as much as 50%. DMart jumped at the chance despite the fact that conventional wisdom at the time favoured leasing over owning.
DMart has been able to maintain a competitive advantage, thanks in large part to this reduction in recurring costs.
Ownership of large properties in Tier-II & Tier-III cities, and on the outskirts of metros results in significant cost savings for DMart.
2. Cash Is King; Debt Will Make You Sink
To finance its growth, Future Group took on extensive amounts of debt, while DMart merely utilised its surplus cash to do so. In reality, DMart has never taken any external debt and has always grown solely through internal accruals.
The Rs. 416 crore shown as debt on the company's balance sheet are actually lease liabilities, and therefore the business is still debt-free.
When the going gets tough, especially in a business like retail, we all know how one landed up in NCLT, whereas the other just kept going stronger!
3. Slow and Steady Wins the Race
Sounds really cool to be buying properties and not taking debt, but that’s just an excruciatingly slow process. After all, if you’re solely dependent on your own income for expansion, that growth curve has to be a rather long one; and for DMart it was so.
From 2001 to 2011, Big Bazaar opened 250 stores, while DMart only opened 10. However, just like compounding, as the cash flow increased, DMart was able to grow incredibly quickly, adding new locations every year.
From 2011 to 2020, DMart stepped on the gas and opened 190 stores, while Big Bazaar could only open 50.
4. Focused Inventory
DMart prioritised inventory turnover since a high turnover rate means products fly off the shelves more quickly, thereby increasing how much revenue each store can generate. Compared to Big Bazaar, DMart's inventory turned over 4 times as fast on average.
DMart sells basic, no-frills grocery items and boasts the lowest prices around. Big Bazaar, on the other hand, is where you'd find more "frills" like fast food, clothing, accessories, and so on.
Its no-frills approach also extended to the experience. While retail chains put money into the retail atmosphere, DMart only provided basic air conditioning. It was clear on its proposition - cost!
5. The Cost (and Time) Proposition
DMart was able to reach out to its customers with 'Lower Price Every Day' promotions thanks to substantial cost savings. Considering that most Indian consumers are budget-conscious, this has led to improved customer loyalty.
Besides this, you could buy things like cookies in bigger packages at DMart. With this, DMart can increase its bulk sales and give the impression of a deeper discount to its customers.
Furthermore, a moat has been established by Avenue Supermarkets' practice of making early payments to their suppliers. As a result of the prompt payment, the company is able to take advantage of deeper discounts from its suppliers. These discounts are given to customers, so they buy even more.
An additional boost came in from the fact that you could not only save money but also time, by shopping at a DMart. It's common for customers at supermarkets to become irate at the checkout register waiting for their turn.
DMarts have more registers than their competitors, which means faster turnaround and a happier customer.
Checking Out
DMart's success in the Indian market can be traced back to its strategic focus, which enabled it to profit from the migration of the retail sector from the unorganised to organised. IBEF forecasts annual growth of 20% to 25% in India's organised retail market.
DMart is all set to capitalise on this with this the company is expected to open 45 more stores in FY23 alone with 18 already operational in the first half.
It is common knowledge that discount supermarket is the dominant retailer in most developed markets. Often, this supermarket is a regional chain rather than a global conglomerate. DMart, with its rock-solid foundation, is in a prime position to be THE contender in India for this position.
By the way, this high-growth success story can be found in our Rocketship portfolio, amongst other such winners!
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