What makes DMart tick? Ability to extract more from less, say experts

Firm's unit economics remain strong amid competitive intensity

Avenue Supermarts, which runs DMart chain of stores in the country, will undertake its second round of fundraising this week after its qualified institutional placement (QIP) last week. The buzz that the over Rs 4,000-crore QIP generated and its impact on stock price that touched a 52-week high on Thursday has put the company in the spotlight.

DMart is considered as one of the country’s most efficient retailers, with gross and operating profit margins in the 15 per cent and 8 per cent regions, respectively. While peers such as Spencer’s and Future Retail have better gross margins (between 21 and 27 per cent), operating profit margins are lower at 4-5 per cent, data from their financial results show. 

Experts said Dmart’s ability to extract more from less had been at the heart of its winning strategy. 

On an annual basis, Dmart’s FY19 sales per square feet stood at Rs 37,045 versus Spencer’s Rs 17,139 and Future’s Rs 13,166, analysts Avi Mehta, Percy Panthaki and Kunal Shah from brokerage IIFL said. 

This came even as DMart had a base of just 176 stores in the period under review versus Future’s 1,511 stores and Spencer’s 156 outlets, implying it was extracting significantly more from its retail business area than rivals, led by sharp discounts, more footfalls and greater inventory turns.

Reliance Retail, the country’s largest retailer, was the only exception here, the analysts said, with FY19 sales per square feet at Rs 66,000 against a store base of 10,415. 

This came as the retailer pushed into tier-II, -III and -IV markets, improving reach and taking organised retail into smaller towns, a strategy that has allowed it to maintain its lead over rivals.

Same-store sales growth (SSG) for DMart has also been higher than its peers, experts said. 

In FY19, Dmart’s SSG stood at 17.8 per cent versus Spencer's 3.1 per cent and Future’s 6.8 per cent, data from their financial results show. Reliance Retail’s SSG for its overall retail operations was not available. It discloses SSG based on formats.

Abneesh Roy, executive vice-president, research, institutional equities, Edelweiss, said DMart had also been tweaking its product mix and renegotiating pricing with its vendors to extract maximum efficiencies of scale. 

“While food still gives DMart over 50 per cent of its revenue in recent years, the retailer has increased its general merchandise and apparels. This has improved the top line share from this segment,” he said.

In FY19, for instance, food contributed 51.2 per cent to top line, general merchandise contributed 28.3 per cent while non-food contributed the rest at 20.5 per cent. Two years earlier (FY17), contribution of food was 53.7 per cent, general merchandise was 26.3 per cent and non-food was 20 per cent.  

DMart has also maintained its aggressive discount policy amid stiff competition from offline as well as online retailers. The company said last week that it would utilise proceeds from the QIP to set up more stores and fight the competitive intensity.

The QIP and the offer-for-sale, which is expected this week, will also bring down promoter holding to 75 per cent from about 80 per cent.