How DMart cracked the grocery market to become the most profitable grocer in India?!

How did DMart come to be?

DMart was founded way back in 2002 by stock broker turned entrepreneur and now billionaire Radhakishan Damani.

Unlike, its more ambitious counterparts, like Big Bazaar and Reliance Retail, DMart didn't start off with the dream of becoming a large supermarket chain. The first DMart store was built in Powai, Mumbai in a fairly small property space^[2].

But, a few things were clear to Damani from the very beginning:

1. He wanted to replicate Walmarts high volume, low margins model
2. He wanted to understand the basic items in a traditional households shopping cart and provide the best value for those items
3. He wanted to run a company with positive unit economics.

From here on, the board was set and it was time to execute.

1 store expanded into 10, and DMart was already challenging then-leader Big Bazaar's 250 stores business. Soon enough, it gathered more market share to become India's second-largest grocer.

It IPO'd in 2017 at an IPO size of INR 1870 Cr. Today, DMart's market cap has risen to INR 2,51,00 crores!^[3]

The business model behind DMart's low prices!

Damani's main strategy with DMart hinges entirely on the 3 points mentioned above. He understood what the consumers wanted — heavily discounted products. So, all the business specifics were entirely aligned towards this.

• giving consumers heavily discounted products
• grabbing fatter than usual profit margins for themselves

Here's what DMart's business model looks like:

1. Owning Store Space

The first major thing that differentiates DMart from its competitors is its strategy of not renting but directly owning its store space.

While Big Bazaar and Reliance buildd small stores averaging at a couple of 1000 sq ft max. DMart's stores are huge property spaces that span from 10,000 sq ft to the latest 94,000 sq ft, averaging at around ~40,000 sq ft per store.^[4]

Another differentiator is the locality of these stores. While you'll find Big Bazaar and Reliance Retail stores in malls and shopping complexes and in residential areas. DMart stores usually take a different angle.

1. In crowded, densely populated localities, DMart builds stores where they'll witness heavy footfall.
2. In scarcely populated localities, DMart buys cheap land on the outskirts of a city to buildd huge retail store space, so they can provide a larger variety of product mix.

In all cases, DMart stores are always standalone 1-floor structures.

The idea behind this strategy is to essentially have the freedom to create large warehouse-like stores so they can manage their supply chain and inventory efficiently. And, to save money on rent. For a normal retail store, the rent expense comes up to 5-7% of their revenue. While for DMart, this is a one-time expense.

2. Cluster Expansion Model

Another huge differentiator between DMart and its counterparts is its expansion model.

Reliance is not able to squeeze in as much profit margin as DMart does, nor can it handle huge footfall in a single store. So, the only way for them to increase their volumes is through rapid store expansion.

Reliance Retail for instance has ~17000+ operational stores. Compare that to DMart's 284 stores all over India^[5].

Now, the reason behind DMart's slow expansion is its cluster expansion model. Like Walmart, DMart only expands its stores in clusters. Meaning, it first establishes a distribution centre in a new locality and then builds stores around it. This helps them efficiently manage their supply chain and inventory.

3. Low Pricing

The third USP of DMart is its super low prices. This is a result of several different initiatives. Let's explore them one by one!

A) Slotting Fees

Given the high footfall of DMart stores, brands pay them a fee to have their products on their shelf in order to increase their sales. This fee is called a "slotting fee". Slotting fee becomes a part of DMart's revenue and in turn, helps them offer higher discounts than usual.

B) Low-Cost Price

DMart has to stock up quite frequently given their high turnover. On top of that, the brand is famous for paying vendors and manufacturers much more quickly than any other retailer. The usual industry norm is expecting payments in 30-40 days. But, DMart pays within just 7 days.^[6]

One of the major pain points of vendors is the lack of constant cash flow. So, because of DMart's quick credit cycle, they are offered much lower prices than others on the already wholesale rates.

C) Low Expenses

One thing DMart is absolutely not known for is its ambience and convenience. Any DMart store looks like a shabby warehouse with 1000s of people crashing their carts into each other. The shopping experience at peak timings is a struggle in DMart. But, thanks to their low prices, people keep coming back.

And, DMart saves a ton that it would rather have to spend on ambience or customer experience. DMart's cost-saving nature was so extreme that, at a certain point, Damani was against having air conditioners in the stores. Thank god he changed his mind!

D) Huge Product Mix

Now, you might have noticed that DMart stores not only carry food and grocery items but they also carry a bunch of different products like apparel, footwear, bedsheets, lamps, bags, jewellery, etc.

The reason behind this diverse product mix is simply the individual product group margins.^[6]

Food & Grocery ➝ 12-25%
Non-food FMCG ➝ 12-25%
Accessories ➝ 20-45%
General merchandise ➝ 25-30%
Apparel ➝ 30-50%
Footwear ➝ 30-55%

Food, grocery and FMCG products account for DMart's 50% of sales. In order to make more money they need to sell other products. That's why the huge warehouse-like store works in favour of DMart. Even if you grab a pair of shoes and a couple of bedsheets on your way out, DMart will make better margins than usual.

E) Large Sales Volume

Finally, instead of providing a range of products, DMart focuses on understanding the top-selling products in a locality and only stocks those products. It saves a ton of money on inventory through this and its sales numbers stay high!

All in all, these 5 specific initiatives produce up to 24 to 30% lower prices^[6]!

The consumer angle: Why bargain-loving ladies love DMart

The result of the above strategy is that every single product sold at DMart has a lower price than the local retailer. This especially benefits bargain-loving consumers. Let's take a few examples to understand this!

1. Bulk buyers — These are the people that buy a month's worth of groceries at once. When they visit, DMart makes a huge amount of sales. At the same time, these buyers save on every item they purchase. So, the more they buy in advance, the more they save.
2. Non-bulk-buyers — Let's say these buyers are on a budget and can only afford to buy a couple of days' worth of groceries. In this case, DMart doesn't make a lot of money, but these buyers are guaranteed to get a better deal than the local retail store. This will improve their marginal savings.

   Example: if someone makes INR 1000 every week and spends INR 800 at retail stores. Considering, a 25% lower price, he'd only spend INR 600, doubling his weekly savings from INR 200 to INR 400!

Reliance Retail vs DMart - The largest grocer vs The most profitable grocer

Now, this entire piece begs the need to ask a critical question — if DMart is so great, then why is it not the top grocer in India? And, how come Reliance Retail beats it?

Well, good question. To understand this, we must look at both these companies' FY22 financials:

Reliance Retail^[7]

• Revenue ➝ INR 1,90,000 crores
• Net Profits ➝ INR 4935 crores
• Operational Store area ➝ 54.5M sq ft
• Profit margin ➝ 2.6%
• Profit made per sq ft ➝ INR 905

DMart aka Avenue Supermart (parent company)^[1]

• Revenue ➝ INR 30,353 crores
• Net Profits ➝ INR 1616 crores
• Operational Store area ➝ 12.1M sq ft
• Profit margin ➝ 5.3%
• Profit made per sq ft ➝ INR 1335

So, DMart's profit margin is ~2.7 times Reliance and their profit per sq ft is 2x that of Reliance. So, even though Reliance leads in revenue and market share, it's overall less efficient and profitable than DMart.

Comparing Inventory Turnover ratios

A good indicator of efficiency is their relative inventory turnover ratios. The inventory turnover ratio basically tells you how many times a company sells their inventory in a year.

Inventory Turnover Ratio:

➝ Reliance Retail = 1.27^[8]
➝ DMart = 2.47^[9]

Assuming both parties have the same batch of inventory size, the no. of days it takes to sell a batch of inventory is:

➝ Reliance Retail = 365 days/ 1.27 = ~287 days
➝ DMart = 365 days/ 2.47 = ~148 days

Let's say that each sq ft of both retail stores carries the same amount of inventory, with the same cost price and margins (although we know DMart has better margins)

1. If DMart sells Rs X worth of products each day
2. Then, Reliance Retail makes => INR X x (148/287) = INR 0.515X selling products
3. So, DMart makes => (X - 0.515X)/X x 100 = 48.4% more revenue each day for each sq ft of store space all thanks to its marginally better inventory turnover ratio.

Many experts predict that DMart could soon expand to 1500 stores all over India. Now, Reliance Industries and its super deep pockets have the potential to undertake such wide expansions. It even bought Big Bazaar's parent company, increasing its total market share now to ~50%+.

But, DMart has to sustain itself with its earnings. So, like before, it's safe to assume they would be expanding slowly with care, always keeping their profitability as the first priority!

DMart is now online, but can it maintain its profitable streak?

The Indian household consumption market is a literal goldmine the size of $1.3 trillion dollar. So, investors always longingly keep eyeing this sector. And, they have come up with a new norm - the squad of online retail stores of the likes of Instamart, Blinkit, Jio Mart and more!

These online stores have the potential to take away DMart's market share. So, in order to compete with them in their field, DMart created DMart Ready. But, DMart wants to fight the online battle on its own terms.

It doesn't participate in the free-delivery practice and to cut down on delivery costs, it asks customers to pick up their products from its DMart kiosks! Ultimately, its top priority is to fix its unit economics and turn profits.

So, will DMart Ready be the first online delivery platform that's profitable? Well, we are yet to see how DMart figures this out. But, it'll surely be an exciting journey! 😁