How D-Mart battled the giants

The chain has managed to keep online and offline challengers at bay, staying in the black even as other big groups have faltered

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Disruption has been the buzzword for the Indian retail sector as old practices and notions about consumer behaviour have been tossed into the junk heap by a burgeoning army of e-commerce players and the entry of large corporate houses. But the 14-year-old brand D-Mart, owned by Avenue Supermart, has managed to stay profitable and grow, even as big challenger brands such as Aditya Birla Retail, Tata Tesco's Star, HyperCITY and Spencer's Retail have challenged its dominion. Smart pricing, supply chain management and the fact that it owns the majority of its stores, say experts are bringing in the rewards. But as the chain seeks to scale up and raise public funds, it could be up for its biggest test ever.

D-Mart is the third largest chain in terms of total revenues after Reliance Retail and Future Retail. It has 112 stores and is smaller than most in terms of size. But the topline has grown at a compounded annual growth rate (CAGR) of 40 per cent from FY12 to FY16. Reliance Retail has in comparison, grown at about 30 per cent CAGR.

D-Mart's profits grew at a CAGR of 52 per cent from Rs 60 crore in FY 2012 to Rs 321 crore in FY 2016, the company said. Reliance does not share details of net profits for the retail business. D-Mart which follows the everyday low prices (EDLP) model, popularised by Walmart, credits three things for its success.

Low prices
The chain offers a minimum two per cent discount over maximum retail price (MRP), a move that it adopted early on. D-Mart says its target customers are lower-middle, middle and aspiring upper-middle income consumers on the look-out for bargains. "We believe that getting value for money is the most compelling factor in daily shopping decision-making for these income groups," the company says in its draft red herring prospectus (DRHP) filed with SEBI.

The store keeps its discounts all year round, not just for festive days. A strong supplier network, supply chain management and careful product assortment helps do that. D-Mart says that it pays attention to the localities it opens a store in. Instead of following a routine stocking strategy, it makes sure that it gets the mix of local and national products and brands right.

Suppliers play a key role and the chain says it has kept them satisfied by paying them on time. It pays within 48 hours of delivery, and they, in turn, allow for an additional two to three per cent gross margin to the chain, retail experts say. Organised retailers often buy goods from suppliers on 30-60 days credit. A senior executive in Kishore Biyani's Future Retail says a short credit cycle cannot be adopted by large retail chains as credit plays an indispensable role in generating return on capital for large volumes.

Raman Mangalorkar, chief executive of Atom Data Lab and former CEO of Jubilant Retail says the chain's ties with FMCG companies allow for improved costing driven by large volumes. Sanjay Badhe, retail consultant and former marketing head of Aditya Birla Retail says, "It (D-Mart) responds very quickly to vendors." The supplier community believes that the store listens to them. Badhe adds that D-Mart wins favour from suppliers also because it operationalises discounts and promotions very quickly.

Ownership, not rentals
D-Mart owns most of its stores and saves on expensive rents which constitute three to seven per cent of average retailers' sales. It is looking to build 900,000 square feet of new stores in the next couple of years, the company says.

"Since rent is a big element of operational costs, that burden goes away, boosting operating profits," says an executive of Reliance Retail. Another factor that works in its favour is that it has stayed out of malls, thereby saving on maintenance charges and exorbitant rents. D-Mart says that owning the real estate helps control fixed costs and execute the EDLP strategy. However, Mangalorkar says their profitability will need to be looked into after accounting for their increased investment.

When opening a store, D-Mart selects areas around residential societies, an easy catchment area. Costs are kept low by adopting a no-frills layout. "They do not spend much on interiors unlike bigger retailers," says an executive from a Mumbai-based retail chain. The stores are also large, measuring 30,000 to 35,000 square feet. "Whatever rent we pay, we assess whether we can make money from that store within one or two years. We are tough negotiators," says a D-Mart executive.

Clusters and large formats
According to a recent report from Ambit Capital, the neighbourhood supermarket (8,000-10,000 square feet) format offering great prices is what works in India. "This format delivers on throughput at lower costs and offers great fresh food. That apart, from a logistics perspective, stores need to be geographically clustered; there can be one dominant store in one city around which feeder stores can ramp up in micro-market," it says.

According to Ambit, nobody except D-Mart has cracked this model. The store says it has expanded its footprint using a cluster-based approach. "We have strengthened our existing presence in certain regions by opening new stores within a radius of a few kilometres of existing stores and distribution centres. This has ensured the creation of a cluster of stores within a region," it says.