Avenue Supermart: a compounding machine?

(sunilgct) #204

I have been reading this thread for a while.
My 2 cents…

I stay in the center where More Superstore is 2 KM , Metro Hyper Store is 1 KM , Big bazaar 2 KM and Dmart is 3 KM from my place. Despite being far , i visit DMart because of the kind of value i can get it in store. They Have 1000s of products and every week you can find offers which no other competitor can match ,.This keeps changing …
eg during Diwali , I got the MTR soan papdi packet MRP of 65 rupees for 31 rupees. Discount of More than 55%.The same was available for 58 Rupees in Metro and 60 Rupees in More.
The customers of Dmart what i observed are loyal to the brand of Dmart .

This is just half of the story , You invariably buy much more than what you wanted to buy because of the tempting offers and most customers are middle class neighborhood who like to visit the store and buy unlike the typical IT crowd(even though i am one of them :-)) .
To also add one of my friend supplies Packaged masalas to DMART , they squeeze to the last drop in price negotiation and they are very prompt in payment within a week.
So unless you see something coming in Big and most importantly matching the prices of DMART (which i doubt ) , i can only see business growing .

(subodhs) #205

Thanks again Gary24 for your insights. My take on the issue is that while urban India is embracing (at whatever rate) the e-commerce way of buying groceries, the old ways of rural/semi-urban India is yet to change. People still want to touch and feel the products and compare them before buying over there. I have done extensive traveling throughout the countryside and find that adoption of online grocery buying is only in urban areas. It is hyper-convenient for people in a city to shop the way you do, but people with the luxury of time and the inclination to go to a bricks and mortar store will continue to do so. This can be evidence by the rising crowds in D-marts wherever they open a new store, and I have visited many in my city myself and can vouch for the near-stampede on weekends. Also somewhere in the thread above is the mention that D-mart does 108 million bill cuts in their stores, and I am not sure of any other online retailer in India who does so many with groceries. So, all in all, let us keep our opinions and agree to disagree on this issue. Only Father Time can be the best arbiter in this case.

(msahani) #206

Article published in the latest issue of Forbes India.

(shimoli.singhal) #207

“My views are Bullish on the company. it can reach levels of Rs 2,000 but it will take some time and will not happen immediately.”, says Ashish Kukreja.

Source: BloombergQuint

Received this message via BloombergQuint’s WhatsApp subscription service. Click here to subscribe: https://goo.gl/xSUAYs

(Bheeshma Sanghani, PhD) #208

Bear case

  1. DMart buys directly from manufacturers and in volumes. In many cases, it ties up the capacity of the manufacturer and if the manufacturer is not able to add capacity to service Dmart then it will lead to stockouts of key items. Worse, if the manufacturer takes on debt to add capacity it will put further pressure on its margins and the firm might go belly up in a recession - jeopardizing the very supply chain that has made Dmart so successful. That is one of the reasons D-Mart pays suppliers quickly - to ensure that enough working capital is available to suppliers so that Dmart doesnt suffer due to working capital crunch of its suppliers.

  2. Dmart relies heavily on contractual labour to man its stores. Contractual labour work for less and are paid at a daily level. Many work two shifts. They have no loyalty to Dmart and can easily shift jobs in the event they locate better opportunities. Availability of low cost manpower is central to a discount retailer and will put a natural cap on the growth. You cant grow without having people manning the stores.

  3. Escalating real estate prices - Since Dmart owns or takes its stores on long lease - the ability of the company to grow depends heavily on its ability to find good quality real estate at a reasonable rate in areas with a suitable population density. By default areas with a heavy population density have real estate rates that are very high. So D-mart makes projections in advance about expected population shifts and buys real estate in advance. This makes Dmart a part real estate developer and also a capital instensive business. They did this in Pune and it has worked out well for them but its not a sustainable strategy in a period of escalating real estate prices.

  4. Emergence of institutional buyers - Many manufacturers are shifting their focus to institutional buyers rather than retail buyers. Catering to institutional buyers has many advantages , long term contracts, assured volumes, better margins and also many institutional buyers provide advances for capacity expansion. It is a near certainty that many suppliers to D-Mart will also supply to institutional buyers in future.

  5. Online threat - much has been said about this so wont go into it. However, online ecommerce is a play on convenience and variety. People who like stuff delivered at the doorstep + like to have a wide variety to choose from and dont mind paying a little bit extra for this are growing. Ecommerce players have a strong advantage when it comes to revenue management - for e.g if Amazon comes up with a scheme that offers a 20% discount on an Iphone provided that you buy Rs 5000 worth of groceries from Pantry - and advertises this heavily - many value conscious buyers will buy from Pantry as the “Bundled value proposition” is compelling. This kind of revenue management tactic make Ecommerce a dangerous adversary to have especially in India and Amazon has the undisputed capability to make this happen.

These are my top 5 items in the bear case.

(kingzeusvj) #209

very true. I can relate to each and every word of yours. I would add:

  1. min. 5% discount on every product 2) products for middle income & upper middle income group.

(kingzeusvj) #210

Suhag, I do agree with you.

But don’t you think - a person, even though he/she is earning handsomely, can spare 2 hrs once a month when it is known to everyone that Dmart gives minimum of 5% on every product.

I regularly purchased monthly items in range of 5k to 7k; and each time got discount on average of Rs. 1200 to 1800.

(kingzeusvj) #211

I cant agree more with you. Point 1) & 3) are totally practical.

(kingzeusvj) #212

Couple of days back, I was reading an article on “The Verge”, where they did a survey in US and one startling fact: US citizens have trust on Amazon as much as they have trust on Banks.And after experiencing the meteoric rise of Dmart since a long - I can vouch tht same would be the picture with Dmart in couple of years (not literally this would happen; but yes the trust and brand loyalty towards Dmart would increase multifold).

(Bheeshma Sanghani, PhD) #213

Excellent read

(msahani) #214

Indeed a great read. Thanks for sharing. Loved the last paragraph…

“At some deep and fundamental level, Indians are a deeply sensible people. We may enjoy the hype that surrounds designer brands. But we are rarely taken in by it. When we do spend our money, we spend it wisely, and on things that will last.”

(msahani) #215

Hi Bheeshma, evidence of Vir Sanghvi’s article in action. YouTube is full of such videos with consumers discussing their shopping hauls, comparing every purchase with the MRP and getting tremendous satisfaction on the discounts availed. It was also interesting to see (from 4.20 min onwards), that even such VFM customers compare the prices against Big Basket and Grofers to see if the discounts are for real at Dmart. It looks unlikely that Dmart will be paying all such people to upload the videos as each one of them have thousands of subscribers. Classic case of positive feedback loop.

(msahani) #216

A Big Basket customer’s candid feedback to its Founder/CEO on Dmart’s product quality. Requires guts. Customer is SUPREME.

(Nolan) #217

This most certainly has the potential to disrupt the brick & mortar retailers in India.

Organised retailers hold just 8% of it. Small kirana shops make up the remaining 88% of the market. It is this market that Ambani is accessing through his telecom foray.

This has straight reference to my earlier posts where I have shared doubts about how retail giants in India would address the high population density and reorganization of mom & pop store culture in India. It seems the elder Ambani has found precisely the breakthrough to this juggernaut. To tap the large and dense population base in the country, a giant superstore model would be capital intensive and operationally unviable. Ambani, on the other hand, wants to open kirana shops. In fact it reminds me of a recommendation I had made during a consulting engagement with a retail chain where they wanted to attract rural population on the outskirts of the city to come shop in their superstore in the heart of the city. I had recommended small distribution depots at various locations which would be easier to manage and a cost effective way to reach out to the rural masses. Ambani being Ambani has thought a step forward. He has brought unorganized mom and pop store culture into the heart of his retail strategy, and he wants to make them organized. This would be low cost, operationally viable and evenly spread far and wide to cater to large population bases. A masterstroke in my opinion, and if the supply chain is managed efficiently, it will prove to be disruptive giving sleepless nights to the retail giants.

(nowin) #218

I am not sure whether this annual report analysis by Vishal khandelwal has been shared here. I tried to search with key words here but didnt see it here. Let me know if this is a repeat.The report scribbled on the annual report nicely explains the key aspects of dmart. (Tried to upload the pdf but it is more than the allowed size)


(Bheeshma Sanghani, PhD) #219

Hi @Nolan

Organized retail segment is underpenetrated in India with a few competitors. Usually the full force of competition is felt in when the market has expanded and there is less room for further expansion. For e.g Television sets is one such category. Entry of competitors in the initial stages of an underpenetrated market generally serves the purpose of increasing the growth rate of the industry. So from that point of view Ambanis plan is good news for retail in general and all players will benefit including Dmarrt.

This happened in online food delivery where in entry of competitors served to increase the overall pie substantially. The net result is that we now have more people ordering food online. Overtime however the market tends to favour companies with operating excellence and firms that don’t achieve operating efficiency tend to go belly up.

Smartphones is another such category.

(Nolan) #220

Dear Bhishma, I have no doubts on the prospects of retail industry in India. I think the astronomical valuations of Dmart already factors in its good performance and the industry’s future potential. But to sustain these valuations, I am expecting the Company will have to do a lot more than just 3-5 years of good performance. And that’s where competitive forces would begin to play catch-up. There are already so many players (organized/unorganized) coming up with parallel business models to tap the opportunity in retailing. My submission is to weigh one strategy against the other and to figure out who probably has a winning model to succeed in long term. There are several layers and discussion points of merit on which there my be divided opinions:

  1. Service delivery model: Online Vs B&M - An asset light model would benefit the Ecom retailers in the long run as government expenditure on roads and internet connectivity increases. The high capex/opex model of B&M hypermarts would make it unviable to penetrate and exploit the untapped market beyond a certain limit.

  2. Organised Vs. Unorganized retailing - Organized retailing is just about 10 odd percent of the total retail opportunity basket. That is what big players are fighting for. The wallet size of the customer they serve is definitely bigger in this segment but the low margins would keep getting squeezed as new players join in. Reliance would do just that but with a difference. It has a potential to click because it not only will target the 10% organized retailing market but also the remaining 90% unorganized market, which it will partly convert into organized. And Reliance would enjoy the exclusive benefits of this converted share because no other retailer has a model to tap into the unorganized segment yet.

  3. Small (mom & pop kiranas) Vs Hypermarts - Ever thought why local kirana shops still flourish in India (in both urban and rural locations) despite the retail revolution we are experiencing. They just refuse to die. In fact they are reorganising to face the challenge from superstores. It is because the local stores are already doing (since I don’t know when) what Dr. C K Prahalad suggested as the next curve of Marketing in his 2008 book ‘New Age of Innovation’. Prahalad said n=1, where every customer should be treated as an individual with customised needs, and R=G, to create resources to personalize the experience of the customer. My local retailer knows me by name, never makes a fuss if I don’t have change, delivers to my household help even if I am not home to pay his bill, understands my buying habits and personalizes accordingly. My wife once suggested him that she got a particular offer in a superstore which was better than the one on his store. He messaged me on whatsapp matching the offer the very next day, and now he regularly asks me to share any recent hypermart experience/offers and that he would try his best to match them. In terms of convenience, customization and personalization, hypermarts will still take good time to catch up, while they serve dozen a minute customers at their multiple POS counters.

  4. Global strategies Vs Local execution - Hypermarts are a borrowed concept. I doubt that picking a global strategy borrowed from developed world and replicating it verbatim in India would fit in well. If hypermarts are happy with the ~10% organized retail market (facsimile of developed markets in consumption), then its fine, but to expand the canvas of opportunities and tap into the 90% unorganized market, either retail players will have to wait for the demographic shift in India’s income and consumption patterns or they’ll have to think something out of the box like what Reliance is thinking - something with a ‘desi’ touch.

I liked the food delivery example very much, but in a different sense. Food habits of Indians can help so much in learning the buying patterns of Indian consumers. Variety in taste palette is the key - from puchkawalas and bhelpuriwalas to full-service restaurants and fast-food chains. Even the greatest food brands realized that they need a different DNA to succeed in India. That’s when they invented an aloo-tikki burger and “5 rupee Pepsi”. That’s the desi touch we need in retailing too!

(msahani) #221

An interesting read in context of different member views arising partly out of past beliefs and experiences.

(Nolan) #222

After Telecom-War, Retail looks like the next hot, exiting and dynamic space with Reliance’s entry…As their grand plan unfolds, it seems nobody is spared…

(Abhinav Mehrotra) #223

Sharing with everyone a 2012 Valuex Vail presentation on Amazon’s business model with an intent to study the competition.

The first 25 pages are relevant to understanding their business model, advantages, and disadvantages. After that, it is a pro-forma valuation exercise.

The presentation touches upon many of the facets of consumer behaviour which we have been discussing here.

amzn-valuexvail-2012-josh-tarasoff1.pdf (450.1 KB)