Avenue Supermart: a compounding machine?

(Nolan) #164

While analyzing population demographics, the contrast in population density of western countries compared to India may actually work against Indian retailers. In India, the population density is way higher at 1,042/sq. mile ranking it 8th among the most populous countries in the world, compared to US with pop. density of 86/sq. mile ranked 79 (source: UNDESA). A concentrated population base around urban centers in western countries makes it much easier for retail giants to cater to the large sections of the population by opening 2-3 giant stores which themselves become the urban population hubs for these cities… However, in a country like India, a retail chain will have to open countless number of stores to cater to even a fraction of the total population.

Also, the mom and pop store culture seems to be re-organizing at the local level in India with many small players upgrading themselves into mini superstores denting the large superstores’ market-share. Infact, I shifted from Grofers to Vishal Megamart first for all my groceries due to proximity. And now recently I have shifted to another local mini-store which is run by 4-5 young lads but is even closer to my residence. They deliver same quality product within an hour, without a minimum basket size, and are very accurate with their delivery. Their offers are quite reasonable and I don’t feel the need to go to any superstore for household items. And a few days back another similar store came up in my vicinity named ROC (Round o Clock). Their proposition is that they are delivering 24x7. These are some unknown stores with good value proposition for someone like me and I feel the giant stores sales would get needled by these local stores severely in coming years.

And as digital India progresses, road connectivity improves and logistical supply chains become more efficient, e-commerce will penetrate much faster than the brick and mortar players. The CAPEX required to cater to the huge population (which we see as an opportunity) would be almost impossible for B&M retailers, not to mention the complexities involved in doing business in semi-urban centers beyond metros and state capitals. At the same time, the e-commerce players will enjoy the government’s infra expenditure on roads and internet penetration, as they build a business around it with much higher capital efficiency.

ASL is overvalued and most of us are counting upon its future growth to bridge the steep valuations. I am quite sure that its a risky bet for next 3-5 years as it may take longer than that to rationalize from current levels. But even if we are thinking with horizons of 20-30 years, is it even possible to factor in all major variables which can have an impact on its business for decades to come? I feel its a long shot and can be avoided unless it corrects and gives a significantly better entry point in near future.

Disc - Not invested

(subodhs) #165

Please excuse my rather greenhorn views cos I am a newbie into investing. I had a query about the quarter-on-quarter sales, there is a small drop of about 90 crores from June to September quarters of this year. Could this be an effect of the monsoon that led to lower footfalls or is it a small crack appearing in the facade of India’s best retailer’s business model? Also, I could not help wondering if for a young and growing company, is it okay to post a drop in sales? Market tends to forgive high debt in fast growing companies, even a lack of cash flow, high inventory levels and unfavorable payable-receivable position, but will this drop in sales go unnoticed/un-pardoned by Mr. Market?

(Abhinav Mehrotra) #166

Spot on Nolan,

Some people see the population density as a positive because it yields to each store catering to a higher number of customers which directly affects the bottom line positively.

But the reality is somewhere in the middle where higher density population is a double-edged sword. It creates negative externalities like parking, traffic, in-store congestion and higher time to checkouts.

These negative externalities will push newer generation consumers towards cost, time and convenience effective e-commerce delivery models. Which DMart can also compete in.

The main question is would customers prefer another standalone grocery app or prefer a one-stop shop for all their needs like Amazon with compelling Prime features (It remains to be seen if people will still stick with Prime at higher subscription rates).

All these are very subjective parameters, which would classify as known unknowns. Are they factored in the current valuations? Hell no.

(Bheeshma Sanghani, PhD) #167

One can speculate indefinitely on the pros and cons of population density and its impact on retail.

I was part of the research team engaged by the now defunct Subhiksha when it came to Pune in 2004-05 to expand into Pune. We were supposed to give them a catchement size or the total population that could be served in a 2km radius. They expanded aggressively and we all know how it ended. They also started at roughly the same time Dmart started and with the same EDLP plan.

There is more to EDLP than what meets the eye. Giving low prices every day is like technical analysis in investing. It seems easy, it looks easy but only a tiny tiny minority is able to make money in it over their lifetime.

Dmart has successfully implemented EDLP in a complicated country like India which has a ridiculously high food diversity- and has an enviable record of not closing a single store till date. According to their 2017 filing they did bill cuts of 10.85 crores. Thats 108.5 million bills processed. These numbers occur in the wildest dreams of retailers.

You could go through the Phoenix Mills ARs or the Prozone Intu AR’s or the Biyani group AR’s or Vmart ARs or any other retailer of your liking.

I reserve my views on valuation and there is a good case of it being expensive - but on the other hand there is also a fair case of it being undervalued ( the market doesnt do a good job of factoring in subhiksha). It also assumes ecommerce retailers ( for which FDI is prohibited in India except marketplace models) taking over the world despite the evidence that they are loss making. Somehow the fact that online e-grocers dont make money gets sidelined.

Also i think, that one must travel to the outskirts of the city they live in - to get a perspective about the new settlements being formed.

Disc-Not invested

(Akhil) #168

Excellent point. Also, more population may not necessarily turn into more profits and vice versa. US has(had) many times more per capita income than India. So an average US citizen buys much more groceries than an Indian.

(Prasad India) #169

I have a freak doubt.
what if the store is open round the clock?
will it sustain? can they meet the demand?

(Nolan) #170

Its already being considered but nobody is sure about the implementation. Major factor will be whether the footfall would justify the operational costs.This is besides all issues like security, permission and licenses etc.

(nowin) #171

I feel dmart can give decent returns in the long run. Its a big no for short term investors.

The key points for dmart in my view :-

  1. Dmart stores caters to even low income groups.Their stores are not fancy when compared to other retail chains. As a result even low income group people find it comfortable to enter dmart. Remember that these customers are mostly reluctant to enter big bazaar and shopping malls because their general perception is that things will be expensive and i may not be able to communicate with the polished English speaking staff. Dmart staff is also very simple and can easily communicate in local language. So basically dmart is approachable for such people and this is a strength. I dont think these customers will switch to amazon given the fact that they are not comfortable with internet. These customers may not be giving high value revenue ,but major chunk is in cash.
    Remember that in general a customer paying with card becomes a 2%cost for the seller.

The above point is the biggest strength of dmart as this segment of customers will keep growing and it will be tough to snatch these customers from dmart.

  1. Dmart also caters to some small retailers. In my last few visits i observed that few individuals buy huge quantity of a single product. I saw one individual buying huge boxes of tissue paper , another buying full boxes of cold drink , eggs etc.these guys were surely not buying for home needs. I confirmed this from a friend of mine whose family has some kirana stores.
  2. Even middle income groups (including me) prefer dmart. My wife says that hypercity and big bazaar promote specific brands more and at times the brand that is required is not available. On the other hand dmart has all the brands she has in her list. So i assume dmart has inventory management based on demand and not commission.

I wont elaborate on other points as they have been discussed in detail in previous posts

Disclosure :- invested

(Bheeshma Sanghani, PhD) #172

Hi @Rajkamalpol

large FMCG companies operating in India have had a good run for decades. This was due to the fragmented nature of retailing allowing them tremendous clout over the supply chain. This supplier power allowed them to capture most of the value in the value chain leaving little on the table for the numerous small retailers.

Due to the target segment they focused on- they created all these “lifestyle” elements in their products allowing them to charge a premium and all this premium fell to their bottom line as they were able to retain it due to their clout over small retailers forming a bulk of their distribution network.

In this process, they ignored the consumption needs of a large part of india - when the monthly all india grocery bill per person per household in Urban India is Rs 1121 ( 2012 data ) - why would an FMCG company with a gross margin of 50% & tremendous supplier power even be interested in making anything for this group - The per capita spending is too low to attract them given they are so used to the juicy margins

To serve this segment one needs retailers like Walmart who wield significant clout over these companies. Walmart gross margin is 25%.

These kind of retailers ensure that this segment gets served with their buying power and ability to grab a part of the value from FMCG companies and passing some portion down the line to its end segment.

With about 109 million bill cuts per year, Dmart falls squarely into this category of retailers. Its Average bill value is Rs 1095 per bill with ~54% of it coming from food - mirroring the consumption pattern of the average urban indian with limited income.

A commonly accepted measure of retail performance is ATD or average trading density - this is the sales per sqft per month.

The ATDs in Indian Malls are Rs 1475 per sqft/pm (http://www.indiaretailing.com/uploads/Market_Research_pdf/50-53-Report-MOI.pdf)

The best performing mall in the Phoenix Mills stable is High Street Phoenix & Palladium in Mumbai with a trading density of Rs 2894 psfpm. The ATD of all malls in the Phoenix mills stable is about 1400 psf. Food, Beverages, Hypermarket & Departmental has an ATD of Rs 1612 psfpm across all Phoenix Malls.

Dmart has a trading density of Rs 2414 psfpm with an SSG of 21% its slated to cross Rs 2900 in FY18 - a remarkable performance in my opinion.

Some interesting articles ( though dated ) that help to compare trading densities :-


(valuebuyer) #173

Star Bazaar (Tata owned) had experimented in a western suburb in Mumbai by keeping it open till 12 at night. However it failed to attract the kind of footfalls as expected and eventually shifted back to day timings only

(Bheeshma Sanghani, PhD) #174


Some comparative prices ( Dmart vs Amazon Pantry)

Bournvita 750 gm - 255 vs 291

Society Tea 1 kg - 330 vs 415

Kellogs Cornflakes 875 gm - 240 vs 290

Patanjali Ghee 1 kg - 560 vs 560

Amul Butter 500 gm - 210 vs doesnt stock

Balaji simply salted 150gm - 27 vs doesnt stock

Maggi 2-Minutes Noodles Masala, 560g - 83 vs 89

Surprising not to see any ketchup brand on Pantry except Kissan and Mapro

Minimum bill 1000 for dmart. Rs 49 or 3% of the bill value whichever is higher for home delivery & free delivery at pickup points.

(anand21) #175

Dmart Opened in my city ~3 year back, initially i could go and easily cash out in max 3-5 mins (after picking items) on sundays and holidays now i have to wait in line for min 15 mins on sundays and holidays, Even a novice eye can easily they can open another store and have people waiting in line to enter.

Main USP of DMART from a consumer point:

  1. Not in main city and not very far also huge parking
  2. Pricing.
  3. Range of branded items (good compared to Reliance fresh and Big bazaar)
  4. Staff is more trained compared to others.

My own Views
Invested @ ~500 level

(Kumark) #176

Nice Article in Forbes ,

(Bheeshma Sanghani, PhD) #177

Thanks for sharing @Kumark. - the base rate for failure in retail is very high. Somehow dmart , through trial, experimentation & of course hard work and and i must say - dollops of luck has stumbled upon a workable model. To have 7 successful stores in amdavad - traditionally a graveyard for retail - merits further study.

This is a classic case of a company which has a consciously chosen what not to do and not tried to be very smart and kept things simple ( as Noronha astutely says). Deeply impressed

(Kumark) #178

Absolutely and until E-commerce actually becomes a threat, its long way to go. But interesting know that they have started with long term leasing to grow which is well thought out looking at the real estate prices and some places really not affordable. I want to add more of it but valuations look so expensive quite tough to take a call and feels it remains at these levels.

Disc: Invested

(Gary) #179

If Dmart has to become Indian Walmart, I am certain that these simplistic procurement leverages are not enough. Dmart is not that big that it could dent a fmcg company’s sales… Like Walmart could do after it became big. Plus online growth and entry of hundreds of new brands in last few years are highly disruptive.

Net net - retail is a poor margin business and nothing will change that. Growth is there today but can it justify the valuation…where is margin of safety.

(msahani) #180

(subodhs) #181

I somewhat kinda agree/disagree with your opinion/analysis Gary 24. Younger companies that can produce future dominance are always priced at a premium. I was one of the proud shareholders of Titan when it was at 350 rupees a share and the EPS was 3 to 4 bucks max. I still hold it and have stopped counting how many baggers it is now. Its foray into branded jewelery in a big way produced dominance and procurement leverage that you speak of. It also successfully created mindspace and marketshare in an industry with low margins. Despite heavy competition from other chains, it still maintains a degree of dominance and is the largest in branded jewelery in India today. I am glad I did not pay much attention to margin of safety and chose to bet on the business model.

There are a million yardsticks to true value in equities, and all of them do not work all the time… Titan was expensive based on book value, PE, or anything traditional. The business opportunity and the management quality was way too good to overlook (similar to Dmart), so it was invest-worthy. In a similar vein, D-mart is not big enough to dent an FMCG company sales YET. With scale comes the kind of leverage that it can actually make or break a sales quarter for a supplier. I have done sales and marketing in pharma myself, in fact that was my first job. Hence, I know for sure that companies bend over backwards to accommodate big buyers with prompt payment and low product return via expiry. Having said all that, by all traditional parameters Dmart is overvalued and its last quarter results showed a dip of 90 crores in sales, not sure what to make of that.

(Empower the Looser) #182

@valuestudent As an investor in Dmart share and a dividend hunter, i would like to know what was the dividend payout by Wallmart in these 12 years and 17 years period.
Can you please mention a reliable resource where i can find this info?

(Changu Mangu) #183

Hi @empower_the_lo_

Here’s the history


Also check this out :slight_smile: