Completely agree, infact Reliance has now started Jiomart in multiple indian cities. They deliver in 2 days. Although not perfect yet, jiomart is learning and adapting fast. Jiomart started few week back so I would again say its not too late to take on Amazons of the world. The ecommerce true play has just begun and I think with fresh lockdowns again, Dmart management would restart DMART ready delivery service etc in cities like Pune. If not, then I would be surprised by their rigidity. Equally surprised to see a resilient stock today after almost 80% drop in profit. Only shows the dearth of good retail plays and the surety of the street for a Walmart in making!
On rethinking on the rigidity of the management - The true reason is not rigidity, i feel, but it is Self confidence. Only someone who has gigantic confidence in its abilities to get back the crowd as soon as lockdowns and Covid is over, who feel that no matter what - no one can shake their moat of low cost and quality with titanic instore volumes and above themself, who has more confidence on the people of India to come back to cheap and ok quality products and flock for saving that few extra bucks on every purchase…can act so boldly.
They had got the model perfectly right and so believe in that. Strangely, instead of disliking the rigidity, I am now starting to like their confidence. They did get their DMART Ready and DMART on wheels right, they can get it right again. Whats not right is what has not always been right - which is the price I need to pay to get its stock - even after an 80% plunge in profits and not so good growth for sometime ahead…
While D mart may change the multi delivery model anytime it want, what aches me is their rigidity in doing so. Even local kirana shops are embracing the technology in these tough times, but D mart has not yet aggressively done it. It’s already 4 -5 months since lockdown started and we are again staring at it, although western countries gave a huge warning and sign of second wave D mart is still not prepared to grab the business.
Another point is - even elderly and conservative people who were reluctant on using digital channels are embracing it. It may so happen that they may not need D mart as before due to change in behavioural practices and D mart’s absence from online marketplace.
Confidence is good but over confidence is risky. But again it’s D mart and it’s Damani, so we never know what they are up to.
Was invested in Dmart past 3 years . Later identified there could be biz model risk in covid and had exited.
There are opinions in the thread on stopping Dmart Ready except Mumbai . But This is the actual reason why I like dmart … strict to principals . My opinion is as follows …
Costco is doing good in USA being a offline retailer where amazon like fierce competition presents. Here the problem is pandemic which results arbitary regulation of closing shops and prohibiting to sell non essentials . Pandemic will fade away within 1 year or after effects will take time upto 2 years . But if RKD changes his Business Model according to investing community or the customers who are fragile (online customers are generally fragile and non sticky ) then the impact will be huge for long term model.
This is an extra ordinary tough time of the greatest consumer businesses who depend on footfalls , scale economics (low cost producer) and in my opinion it is the 2015 Maggi moment for the Great retail stories like dmart, titan and trent . Once these will be over they will come back with vengeance and nobody will have an clue when it will happen (Like Nestle did post 2015)
Interesting views being exchanged in favour of exploring new opportunities, sail with the wind, adopt new technology to tackle interruption caused by current pandemic OR stick to old proven brick-mortar business model and wait for the storm to pass. All this discussion doesn’t hold any value till you see them through numbers.
We must be aware that in Q1, Dmart could open limited stores to sell ONLY essential items (mainly grocery) during April & major part of May. April’20 sales were just 55% of April’19. First half of May’20 had seen little uptick & they could improve April’20 first half by 17%. These translate to April’20 clocking around 1070 Cr & first half of May’20 doing 610 Cr. so overall first half of Q1 got 1680 Cr & second half did around 2000 Cr. Ideally Q1 should have approx 7600+ Cr (without Covid considering approx 30% growth).
Now coming to ebitda margins, which dropped from 10.3% to 2.9%, If we calculate margin based on Q1’FY19, they could have clocked 782 Cr. Actually they did 112 Cr.
They lost 3900 Cr topline & 670 Cr of ebitda margins in Q1. If we calculate the lost margins, it is approx 17.15%. This is exact impact of essentials Vs non-essentials margin.
Now as we see that without non-essentials the margins have already got eroded and reached levels of 2.9%. If we add additional expenses required on Home deliveries / Dmart Ready App etc, the margins could have nosedived further and even possibility of negative margin can not be ruled out. Please note that most of online grocery delivering companies are unable to make profits even though their selling price is well above Dmart prices for most of the items. If Dmart had to adopt these means of home delivery etc & maintain the margins, they had ONLY option of increasing the prices. By increasing the prices, they will loose their core essence of business i.e. EDLP.
As an investor, are we ready to accept loss making Dmart even in short term for one or two quarters. More importantly, Is management ready for this? Investors community may have different opinion but I see the answer as BIG NO atleast from management for time being.
Excellently put forward, more than profits dmart management would not want to loose on their core competence and customer perception which drives in-store volumes…and hence the rigidity. It is a very sensitive thin line. If storm passes in couple of Q’s then fine, if it elongates for couple of year, can’t say what lies ahead …
Interesting report on Retailers from HDFC Securities. It has discussions on DMart’s performance and how eGrocers are benefiting from the pandemic with a case study on Grofers.
Covid 19 is a temporary situation within next six months there would be a vaccine & probably in a couple of years people would not remember it.
IMO changing a successful & proven Dmart business model for an aberration would not be an intelligent move.
India has very large potential for organized retail, as of now the organized retail has miniscule share of the total market potential, it can absorb a couple of more players of the size of reliance without much disruption.
Dmart has already shown it’s competitive strength in preceding decade against competitors like Food/Big bazaar, Reliance, Spencer’s, etc.,
I beleive current situation may be a God sent opportunity for enterprising investors.
First Relience pitch towards kirana segments is bit risky for multiple factors.
Relience will not have control over their shops.
They have to make in investment on shops which is additional investment and need to recover from the margin for both shop owner as well as relience.
How may kirana store are there which is customer friendly
Relience retail was there in business for a while, but who capture the market share and why ?
Their own retail business could not challenge dmart, how with the help of kirana store or online will penetrate. If they had working idea, they could have shown in reliance retail.
Just putting my thought process, apologies it may not be organized.
Currently online sales for essentials are very miniscule for the retail business in India, There is enough space for brick & motor and Online players. If you notice in the Dmart comment they mentioned ‘developed countries where organized retailers had a surge of customers walking into their stores’ in-spite of having the online options for buyers and remember they also have Local grocery stores which in many localities up 40 to 100% in sales(especially in rural locations in US). In western world lock downs are not as long as strict as India so foot falls in retail could be higher.
Local kirana shops in India as the demand increase when full lockdown opens may not find easy to source all the items & may run out of stock that customer needs and also value buy is with retailers in terms of price.
Also if you look at the trend going forward atleast for months to years travel and restaurant eating will be very less or minimal, so people will keep buying more items to eat at home & stay at home for much longer time. So once the fear comes down(like in west), people will prefer to go buy in retail shop or online, the preference of visually check & buy still holds good in my opinion and what is observed in west.
Number of players are consolidated from hypercity & heritage fresh, nigari’s going under future retails and now future retail will sell out giving way for stronger players to take the market share.
Future retail also experimented with Kirana stores and getting them onboard with them but it didn’t work, also other players who tried were unsuccessful, we have to see how Jiomart going to get this as the kirana stores onboard as they are reluctant to go digital etc. due to the cash transactions & keeping transaction unbilled most of the times to avoid taxes.
Now the whole world in race to get the Vaccination, I think it will come faster than usual and mostly with many pharmaceutical companies start selling.
The cost structure of an online business is very different from a brick & mortar retailer and that is because the capabilities that are neccessary for online retailing are fundamentally different from that of an offline retailer.
Amazons complex delivery infrastructure requires huge tech investments and Amazons fulfillment costs alone came to ~$40 billion for 2019 which is 15% of its FY19 topline. Dmart doesnt have these costs and untamed, these costs can make an otherwise profitable business unprofitable. These costs are offset somewhat by the AWS program and the Prime membership - the point is - that brick & mortar doesnt have these costs and thats a big advantage. Dmart Ready is a hybrid approach where delivery costs are shared between the co and customer but its still in its infancy an no one know which way it will go. If you look at any online business for e.g Jubilant Foodworks - you will see the role delivery costs play in their overall business - they too have started to variabalize this item
Dmart ready is not a platform business so i am not sure if i can even call it an online business. Amazon, Flipkart, Jiomart, food delivery etc are all platforms where there are sellers listed selling their wares and the platform makes some 30% of the top. While this increases the reach of the sellers, all of them try to pass on the plaform charges to the end customer. So the online ecosystem mostly ignores products which have a low gross margin as all third party sellers try to load the platform charges onto the customer. Dmart passes on savings to customers by actively keeping gross margins around 15% and giving more discounts as a strategic tool. There is a massive difference in the DNA. However, Amazon Gross Margins are about ~40% ( including its other businesses).
Broadly, i think that Dmart is going to remain true to its DNA and currently i dont think online forays etc are suited to its capabilities. Maybe Dmart ready is a good hybrid approach but it too early and currently until we have more info on the basic unit economics no kind of prediction can be made on this front.
Was talking to some one working for DMart on their strategy with regards to Online shopping.
After my discussion , my take away is as follows:
(1) With regards to " Visual Check and Buy " at brick and mortar stores, today most of the people would like buy a branded product…of HUL, Britania, Nestle, GCPL, Dabur, Marico, TCPL, … Maggi, Cinthol, Colgate, Good day biscuit… Tata Samparn for example has the entire range of Groceries and they are expanding under Tata name…
What is there to go to a store to see and check ???.. People have a preferred choice , they would just order on line and get delivered at home…
(2) Yes, there are non branded groceries… Again two types… Packaged and branded by DMart and packaged by some other Pvt parties… These Pvt parties have created their own brand… These are cheaper… and there is a class of people who would like to buy this…these also can be chosen and ordered from image and description shown through on line system …
(3) Then there are some loose groceries kept in Large containers…these can be still economical… these definitely require physical observation…there is another class of people who would like to go and buy from brick and mortar stores…
(4) However, there is a High Margin on Non - Grocery items which DMart sells in Brick and mortar stores and normally the lower middle class people would like to visit brick and mortar stores and buy…
Ready made Garments…Kitchenware items … Containers in Plastic , steel, glass,…ready made snacks… many other home utility items…
(5) The online strategy has not been scrapped yet, it is being developed as an alternate channel for serial no 1 and 2 . It is still under experimentation stage and implementation across locations would be in phases … …
My take away is Dmat has a lot of challenges ahead post Covid19 to get back all its customers…and get back to its glorious past …given the availability
and options of online shopping …penetration of Smart phone , data, Apps… Digital literacy…
…people’s awareness to avoid crowded places… And continued competition in brick and mortar stores…Reliance… Big bazzar…kirana stores…malls…
Discl: I had invested in DMart… but pruned my position much before announcment if Q1 result by booking a profit…
Hey Kumar. I’m not sure I understood your last few lines. Are you advising people to sell pharma companies and buy dmart because a vaccine that noone has developed yet and nobody knows when it will come out may come out. If that’s the case then it’s pure speculation and you are advising a move from a sector with tailwinds for the next 2 to 3 years to a sector with headwinds for the next few quarters/years? Or did I read it wrong.
Hi Malkd,
I am not suggesting or recommending to sell or buy anything, i was just referring that vaccine will come faster and from many pharmas (ofcourse we don’t know when), people fear will reduce which will increase economic activity sooner. There is headwind or tailwind we will have to see in couple of quarters, but increase in grocery consumption is possible but increase in medicine consumption i am not sure with hygiene practise and stay at home practice.
I am not really an expert in either economy or stock picking. I saw Dmart , loved the store & invested into it. However I have a concern now with Kirana stores are coming into online with reliance platform & Reliance’s model of working. They did this multiple times - offering something dirt cheap & then gain market share , making all competitors out.
They might do the same as well with Kirana stores platform. It will be interesting to watch. However, Reliance seems to be not so great once they gain big market share. Look at Jio - How many call drops do you have per day?
Cheers Kumark. At IPO price Dmart Is one of the deals of the decade… so congrats … at its current valuation I just can’t see it being a good buy though. It’s priced too high for the headwinds it’s going to face. When DMART came out it was underpriced and hence why it reached 1600 in no time. For anyone buying in July 2018 though they had to wait a whole year to make a rupee of profit. I can see the same thing or worse happening now. Until it posts stellar results it’ll just be a laggard due to the high valuations and I don’t see good results for a while. Atleast not as good as pre covid/jio mart/Kirana going digital. I’d rather park my money in pharma/chem/agro now and invest in DMART when the situation improves. It’s all about opportunity cost at present
There are some misconception in Kiana store. It is not easy to bring under Jio. Because small Kirana store has strong society and specially very strong in Tamilnadu . It’s high hype online store can be market changer. Even small country like Qatar Has implemented online store during the pandemic but People like to go Lulu hyper market …I believe could be same DMart infuture. it’s my personal view…
Assuming a large percentage of grocery sales are from branded products in the kirana channel, even if jiomart offers freebies, it would not make them cheaper than dmart. Dmart negotiates lower trade margins with brands to offer customer value, often does not charge listing fee in exchange for better product margins. Dont see a kirana store halving thier current margin to make jiomart grow. Yes, jio could make it free from thier bump up margin, but the kirana store would keep its margin and still be more expensive than dmart for a value consumer, but probably less expensive than amazon
I think we need to take into account the emergence of private label profitability into retail businesses. This is a sector which is still very nascent, and with priority placements in store, economies of scale with large manufacturers, there is potential for new businesses being built within the business.
If a business has great leeway for growth (why does e-commerce have to eat into dmart? Organised low cost retail still has a huge runway to grow in india), a unique business model, top class management etc, no doubt valuations are stretched, but its also impossible to time the bottom. I prefer to think of it as a good long term compounder with a possible near term correction, but as I am not sure if I will get a lower price, its generally been better to keep riding such stories.
I guess there is no comparison between Jio and Dmart. Although the former has focus on retail but it’s main business margin will come from Jio platform and not from Retail on the other hand the later is having a concentrated approach in Retail with being champion at all the classical retail parameters like Cost Control, Cluster Based model, Strong Supply Chain, ROE, ROCE etc. Jio might be compared with Amazon which has a retail business but it’s profit revenue mainly comes from cloud platform on the other other hand Costco a pure retail business continue to grow and claim a super premium in US market mainly due to their superior business model. Having said that this year with the various regulation of lock-down both D Mart and Costco business will be under stressed.
Is there any moat in D Mart which cannot be replicated by others.
There is technically no rocket science in D Marts business model and which is known to all and sundry.
The only Moat I believe in D MArt is Cheap price which they can offer.
If suppose I hire qualified and experienced person just like in D Mart and have all the infrastructure ,minimum technology and financial strength why cannot I perform as good as D MArt.
Reliance with all experience and financial strength has the ability to do that.
My two opinion is that D MArt does not have any special moat which cannot be replicated and hence it may not command the same valuation going ahead also.
Disclosure : Not invested as I do not see any special moat for justifying higher valuation for a longer period of time( 10 to 15 years).
… at its current valuation I just can’t see it being a good buy though. It’s priced too high for the headwinds it’s going to face. When DMART came out it was underpriced and hence why it reached 1600 in no time. For anyone buying in July 2018 though they had to wait a whole year to make a rupee of profit. I can see the same thing or worse happening now. Until it posts stellar results it’ll just be a laggard due to the high valuations and I don’t see good results for a while. Atleast not as good as pre covid/jio mart/Kirana going digital. I’d rather park my money in pharma/chem/agro now and invest in DMART when the situation improves. It’s all about opportunity cost at present