The key point to consider here is what V-Mart is providing a service to customers that allures them to continue buying from them. Consider a small town, say Bhagalpur (where I was born), where people do not have much source of entertainment and shopping experience is limited. These smaller towns have anywhere between 5 lakh a 20 lakh people (kids, men, women, elder), and each of them have aspirations and desires for a better life. They look towards the bigger cities where there are brands like Benetton, Nike, Adidas, Zara etc (none of which want to come to smaller towns due to the economics).
And then a 8000 square feet V-Mart store opens up in their neighbourhood, which delights everyone and they can go there anytime to shop for every special occasion and regular purchases of apparel. As long as they are offered a good experience with good quality clothes at a reasonable price, they will continue to shop there (of course till another competitor steps in reallocating the profit pool). This afeel gooda experience cannot be offered by local retailers, where the nature of shopping is largely transactional.
I think people in cities also want to get this experience of buying good quality clothes at a reasonable price, with a feel good experience of visiting a mall. We go to the malls very often to get this experience when we could get the same clothes at factory outlets or even local retailers.
The fact that people love this experience is exhibited from the sales numbers that we are seeing from V-Mart stores. Sales per square feet of 800 Rs per square feet per month from these smaller cities is something that retailers in bigger cities would be delighted to have. Shoppers Stop has sales of ~650 a 700 psf, Future Lifestyle of ~511 psf and Future Retail of 745 psf. This clearly demonstrates that the shopper is not only visiting for the air conditioner and the ambience, which certainly happens.
Another interesting fact is that they have conversions of 65% - 70% of the shoppers, which clearly means that the aspiring minds of consumers gets them to buy the apparel, even if they have come for wandering in the retail area. With an increasing footfall, rising average sales price that would result in higher sales going forward.
High spsf along with lower rentals of 30 rs psf makes V-Mart extremely efficient on operating costs. Shoppers Stop pays 50 a 55 Rs psf, Future retail 40 Rs psf, and Future Lifestyle pays 55 Rs psf, Pantaloons = 15% of sales is rent, Trent = 12% of sales (largely due to high rentals in metros and Tier 1 cities). This has allowed V-Mart to increase margins from 6% to 9% when other retailers have been squeezed off their margins (see post above)
However, I do agree that local retailers will continue to co-exist along with stores like V-Mart (just like kirana outlets continue to thrive even with Easyday, More, Big Bazaar, Reliance Fresh taking large retail spaces), but there are significant advantages that V-Mart has compared to local retailers and organized retailers, which I am summarizing below a
Experience a Covered in detail above.
a. This is of significant importance in small towns, and more importantly because no organized retailer has been able to setup their infrastructure in Tier 2/ Tier 3 cities, nor have I heard of any focus of these players on Tier 2/ Tier 3 cities (Biyani being too busy with Food Park & Big Bazaar; Aditya Birla getting Pantaloon and More in order; Reliance focusing on large formats Fresh, Digital, international brands, Tata expanding Westside, Tesco, Zara etc)
b. It is not that companies have not tried setting up such infrastructure in smaller cities in the past. An example is Tata owned Trent had tried retailing fashion apparel in Tier 3 cities through stores called- Fashion Yatra - started in 2008, but failed and closed the business in 2012 (10000 square feet stores with prices between 150 - 750 similar to V-Mart)
Focus on Fashion a Realizing quickly that kirana does not offer good margins and is a drag on the business, the management has brought down the % of kirana to 10%. This gives immense confidence in management being able to quickly take decisions for the business. In contrast, large businesses find it extremely tough to make such big decisions and continue to fund losses a this is evident from Shoppers Stop funding Hypercity (even after consistent losses), Trent funding Side Bazaar etc etc
**3). **Lowest cost operator
a. Compared to Walmart, V-Mart has similar costs. In fact V-Mart gross margins are higher at 29% compared to 25% for Walmart. If you consider the operating costs, both Companies have limited their costs to 20% of sales, which is quite incredible considering that other retail players in India operate at 30%+ operating costs (See my post above)
b. Compared to local retailers, there would be a significant cost advantage with regard to sourcing and as you said, the sourcing advantages would become bigger as V-Mart scales, though they are already operating at 29% gross margins. I have looked at various franchise agreements for apparel brands, and they give only 20 a 35% margins to the local franchisee partner. The franchise partner will then have to manage the cost of rent, employees, power, security, advertising, promotions/ discounts etc in that cost.
c. This cost management would ensure that V-Mart would be able to sustain competition in different parts of the country it plans to expand to
Planned and cautious expansion a V-Mart has chosen to expand based on a cluster based strategy, whereby each store is 150 km apart from each other to manage supply chain efficiently.
a. This is incredible as the management has learnt from mistakes made by Pantaloon, Subhiksha, Vishal Megamart who in their quest for topline growth opened stores in all parts of the countryawith warehouses and hence loosing complete control over costsaresulting in high inventory a higher debts and subsequently shutting down of business.
b. Take a look here http://www.vmart.co.in/store%20map.html
c. Now see this…does this remind you of something J http://projects.flowingdata.com/walmart/ (Sourced from Kiranas post above)aAnd NO I am not suggesting V-Mart is the next Walmart J
d. Also as discussed above, store closures have been limited in the last 4 years. Compare that to 50 stores shut by Aditya Birla More, 50 stores by Reliance Retail and Biyani selling Pantaloon to Aditya Birla a showing management credibility in being able to better manage the business compared to the big players
**5). ****Sourcing & Procurement a **This is a key aspect of their business which helps them provide the latest fashion at affordable prices. It is important to highlight here how the sourcing works
**a. **Company has tied up with over 2000 registered vendors across the country where each product is sourced for the best economic value and quality. They get the woolen from Ludhiana, denims from Delhi region, plastics from Daman, kidswear from Kolkata and hosiery from Tiruppur.
**b. **It is impossible for a local retailer to setup this level of sourcing, or for that matter a new organized player will take significant time and investment to setup such a supply chain
c. Given the Companyas localisation strategy this helps them significantly
d. As they scale this sourcing capability can be used to their advantage by dictating favourable terms and pricing to the vendors
Growth a IMHO, if a retail business can provide 8% same store sales growth it is doing extremely well, especially in the consumer markets we have witnessed in the last couple of years. This 8% SSSG, along with opening 25 a 30 stores would yield growth of atleast 30% to the topline, which could imply atleast a 30 a 40% growth in EPS (assuming all other things remaining constant, and economies of scale spreading the central costs over a larger number of stores).
It may not be an apples to apples comparison between Big Bazaar in its early days with V-Mart because of the following
Big Bazaar outlets were 25000 square feet in size compared to V-Mart size of 8000 square feet (At the time of Big Bazaar IPO in 2005 they had 21 outlets, with average area of 45000 square feet)
Big Bazaar offered kirana vis–vis fashion apparel for V-Mart
Big Bazaar operated in big cities (with first stores in Kolkata, Bangalore and Hyderabad), vs V-Mart in Tier 2 & Tier 3 cities
Today Big Bazaar has sales per square feet of INR 750 Rs as compared to INR 795 for V-Mart (even though Big Bazaaras most stores are in Tier 1 cities)
**Return on Capital Employed a **This consistent growth along with an 18% - 20% ROCE that the Company has been able to achieve speaks highly of the management being able to manage the business well over the tough economic period when other businesses were struggling.
The above provides a reasonably good idea of how V-Mart has positioned itself as being a cautious fast growing business, with excellent (and difficult/ time taking to replicate) supply chain and procurement strategy, low cost operator with a distinctive positioning for the consumers (providing fashion apparel at a reasonable price to aspiring middle class Tier 2 & Tier 3 customers).
Happy to answer any further questions you may have.