Another vantage point to look at Dmart is to compare it with one of the most efficient & profitable brick and mortar stores in the world - Costco.
Costco is a retailer - but it doesn’t make any money on product sales. Instead it just about breaks even on merchant gross margin. This virtually guarantees the lowest price per unit for a product. It has gross merchant margin of 11% - as compared to Dmarts 15% and a miniscule <1% Net Merchandise Margin compared to Dmarts ~5%.
Costco makes all its money charging people a membership fee of 60 USD per year. That’s about Rs 4200 per year for getting the guaranteed lowest prices on products stocked at Costco. The membership money goes straight to the bottom-line. Costco has an ROE of 25% and it doesn’t make any money on selling products.
This model has enabled it to have net earnings equal to Dmarts sales. A rather extraordinary achievement in my view.
Customers at Costco get only 1 choice of the product. One choice of toothpaste, one choice of ketchup etc and these products are of the highest quality. So you get the highest quality product at the lowest prices. Guaranteed. The Kirkland Scotch is famous for being available at $38 only. Costco takes the concept of Quality of Discounts at a whole new level.
Thirdly, Bulk Packaging - only 4000 SKUs as against v/s Walmarts 1,20,0000. They sell Mayo by the gallon etc. Sometimes, these packs are customized only for Costco. Since they stock only 1 brand, they are their suppliers largest or second largest customer and they get the absolute best prices which they pass on fully to the customer. The entire system is setup to get the customer to purchase in bulk even if they dont need it.
This has resulted in a record beating revenue per sqft of $1176 or Rs 82000 per sqft. That is 2-3x of what Dmart does. By contrast Walmart is $431 or about 31k per sqft - a bit closer to Dmart.
As if that was not enough, it operates on a Negative Working Capital.
Lets say Dmart adopts the Costco model for arguments sake. It passes on its entire 15% gross margin to customers - that is an additional 15% discount on top of the existing discounts it is already giving. It already has 17.2cr bills with the exisiting system.
Assuming each customer goes there 12 times a year would mean a membership base of 1.5cr roughly or 15 million. Costco has a membership of 50 million.
And Dmart charges Rs 3000 per year (250 bucks a month) for availing the absolute lowest prices in India - guaranteed round the year. That’s 3000*1.5cr per year or 4500 crores of earnings.
At today’s Market Cap of 80,000 crore that comes to a P/E mutliple of 17.7 i.e 80kcr/4.5kcr. Just another Vantage Point for taking the discussion on valuations ahead.
Best
Bheeshma