The only way a retailer can earn a wide economic moat is by doing something that keep customers shopping at its stores rather than at competitors. It can do this by offering unique products or low prices. Offer unique products is tough to do on a large scale because unique products rarely remain unique forever. Its rare to find a retailer that maintains any kind of economic moat for more than a few years. The way to build a moat is to be the low cost leader, and this is exactly what V-Mart has accomplished. IMHO, prohibitive real estate rentals in India are the single biggest recipe for failure for retail (foods, apparel, etc) in metro cities, and hence has led to failures of brands such as Lilliput, Spykar, Vishal Megamart (besides ambitious management trying to expand too fast too quickly).
If we consider globally, the few retailers who have established wide economic moats include Home Depot and Loweâs in home improvement, Walgreenâs for prescription drugs and convenience items, and Walmart for just about everything. These firms developed distinct store prototypes with low cost models that set them apart from their competitors, and they now enjoy vast economies of scale that make it tough for competitors to earn consistent profits.
This is exactly what V-Mart has been doing since inception â offering fashion to aspiring middle class consumers in the untapped Tier 2 and Tier 3 cities, where virtually no organized competition exists and the store economics are favourable to the retailer. This early mover advantage is allowing V-Mart to build economies of scale, and in a sense build a brand where no competition exists.
V-Mart is right at the centre of the consumer boom that is expected in India due to the growing middle class, increasing per capita income, migration to urban areas amongst others. Consumer spending is expected to quadruple in the next 10 years, and a significant part of that will be from the smaller cities and towns.
Consider the cities they operate in - Dumka, Jhansi, Aarah (Bihar), Bhagalpur, Chhapra, Sasaram, Sivam, Mehsana, Chas, Deoghar, Shivpuri, Moga, Barabanki, Gonda, Mau, Sitapur - half of these are cities that I have not even heard ofâ.and look at the aspirations of consumers thereâthe Company is managing to do ~ 700+ rs per square feet..which is the average sales done by Shoppers Stop and Future Lifestyle Fashion in metros.
This consumer boom in Tier 2 and Tier 3 cities is clearly visible if you consider the sales growth of V-Mart vis--vis some of its competitors (Albeit on a lower base). I have taken the following retailers as competitors though they are not directly comparable. Trent consists of Westside, Side Bazaar, Landmark, Sisley and Zara; Shoppers Stop consists of Shoppers Stop, Hypercity and Crossword; Titan has World of Titan, Tanishq, Helios, Titan Eye+, and GoldPlus. However, the representative set gives an idea of the consistency of growth in sales and margins for V-Mart vis--vis competition which has found it extremely difficult in the last 5 years.
|
INR cr |
Sales FY09 |
Sales FY14 |
Sales CAGR |
EBITDA margin FY09 |
EBITDA margin FY14 |
|
V-Mart |
142 |
574 |
32% |
6% |
9% |
|
Trent |
850 |
2370 |
23% |
0% |
0% |
|
Shoppers Stop |
1,365 |
3,358 |
23% |
12% |
3% |
|
Titan |
3,882 |
10,113 |
23% |
9% |
10% |
The reason that V-Mart has been able to sustain its margins compared to competition is due to the low operating cost structure it operates with.
|
% of sales |
Operating costs (% of sales) |
Rent (% of sales) |
|
V-Mart |
20% |
4.3% |
|
Trent |
37% |
12% |
|
Shoppers Stop |
32% |
9% |
|
Titan |
17% |
4-5% |
Growth strategy
The company has identified 652 districts, of which it has mapped out half of them where they can open a new store. It also plans to use its supply chain to setup stores in Nepal, Bangladesh and other neighbouring countries.
Simplistic calculations show that if the business sustains its current sales per square feet (with 5% growth), and opens only 30 outlets per annum â and manages to keep EBITDA margins at 10% per annum, it could manage most of the expansion through internal accruals. I have assumed here that the store capex is 2800 Rs per square foot (1400 for capex and 1400 Rs for initial working capital). However, if the performance is not as estimated above, there is likelihood the company may have to dilute slightly or raise some debt, which would not be ideal.
|
Years |
FY14 |
FY15 |
FY16 |
Fy17 |
FY18 |
|
Number of stores |
90 |
120 |
150 |
180 |
210 |
|
Total Square feet area |
7,20,000 |
9,60,000 |
12,00,000 |
14,40,000 |
16,80,000 |
|
Sales per square feet (INR per month) |
665 |
732 |
768 |
806 |
847 |
|
Sales per square feet (per annum) |
7,980 |
8,778 |
9,217 |
9,678 |
10,162 |
|
Sales forecast (INR cr) |
575 |
843 |
1,106 |
1,394 |
1,707 |
|
EBITDA (%) |
10% |
10% |
10% |
10% |
10% |
|
PAT (%) |
4% |
5% |
5% |
5% |
5% |