I think the risks have been mostly factored in the recent price correction. I don’t see any red flags for long term, if the company survives the quick commerce competition it is bound to give decent returns for long term investors.
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What are your views about competition from Zudio.
DMarts Growth in general merchandise and apparel has been decreasing since COVID. This in turn has further impacted the margins.
What are the exact reasons behind this and there has been no clear road map as to how will DMart handle this.
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Trent’s Zudio can lease any commercial building and start operations right away. but DMart has to own land construct building and open a full fledged store to operate. We cannot compare Zudio’s growth with DMart’s GM&A segment. If you look at the margins both operate an a similar operating margins of around 15-16%.
High inflation, lower consumer discretionary spending can be attributed to the slower growth, but in the long run DMart’s footfall can become a major competitive advantage over Trent.
My personal shopping experience with Zudio is mostly like one time visit, to experience the new store and new merchandise, the quality is sub par. Once the newer stores mature, the footfalls will be stagnant, same-store sales growth will decline and lease rental expenses will hit the margins hard in the long run.
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Karnataka is planning to levy 1-2% on all quick commerce transactions for a gig workers welfare fund. Apart from the existing delivery charges, packing charges, late night charges, GST on them, if this gets approved 1-2% extra fees has to be paid on top of the order amount. I think all quick commerce companies would see some impact if more and more states adopt such fees.
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There are two stocks that are worth revisiting, two stocks which one can identify with and both are down because earnings have disappointed. One is Reliance and second is D-Mart. You track both of them very closely.
Deepak Shenoy: I have not seen D-Mart as closely, but I saw it recently because of all the news about them losing out to quick commerce. I do not think that is quite the case. But of course, at some level, the quick commerce discounting mechanisms and their concentration in the urban markets where D-Mart is popular, will, of course, hurt D-Mart a little bit more than perhaps Reliance Retail, which has a more broad-based presence and also a portfolio.
So, in general, the retail ecosystem has changed or is changing in India and that is a good thing. We are getting price pressure, which is also a good thing, because that means that the consumers are able to get something at a cheaper price. But such things do not last too long. At some point, we are going to have issues, especially when some of these are foreign-owned companies and have quasi-inventory issues because they own inventory on their books through some kind of a side deal mechanism with some other companies and such things effectively catch an ED notice and then, there will be some kind of action that will come in on the quick commerce setup. All the quick commerce setups have something like this going on, where they are mostly owned by foreign players. But even though they cannot own inventory, they have got their own dark stores in a way and that is not really going to fly well. So, in the short term, we are going to have trouble in retail, long term not much.
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Food for thought (not delivery…pun intended) A company which was primarily food delivery from restaurant couple years back and then from IPO money did massive acquisition to save itself by quickcommerce is trading at mcap of 2.3L cr and dmart today is 2.6L cr.
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At 93 PE (or EY 1.41%), are investors fearful of DMart?
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Well it’s not about the PE that investors are fearful, but about the competition from quick commerce companies like Zomato and Swiggy that may hinder DMart’s growth.
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beyond a point its very difficult for quick commerce to compete
True, quick commerce will only survive until they keep burning cash. In a business where margins are hardly 10% how can they be profitable by maintaining infrastructure, dark stores, delivery boys, etc. I see Zomato’s valuations as ticking time bomb that is ready to explode any time.
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This is contradictory and confusing. Could you explain more?
Zomato and swiggy burnt their hands on food delivery business which is high margin and so pivoted on very thin margin quick commerce?
It was the other way. Zomato was accused of bailing out blinkit (vested interest) with shareholders money. Zomato’s co-founder Aakriti Chopra was married to blinkit founder.
But surprisingly, blinkit became zomato’s growth driver.
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Indeed it looked other way. No one in public knew about Lehman collapse until it happened. So either the stars were fantastic with this acquisition or we did not know things back then. whatever maybe the case, such a big acquisition out of IPO money looked odd. But still its 2.6L cr company, for now!
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Generally, food business has high margins say about 30-50% for restaurants if they run successfully. Zomato/Swiggy unable to take their share in this business to be profitable.
They have found their advantage in the delivery network they established and pivoted to quick commerce to see if it works. The existing retail stores, DMart and others are unable to make more than 10% margins out of this business. How will quick commerce come out as a profitable business in this sector. If that has to happen, more than 10% of the population should be working as delivery boys struggling to meet their ends due to the high unemployment in India.
Even Amazon with its massive delivery network failed to become successful with Amazon Fresh. Do you think Amazon is able to make profits by selling only third party products on its platform? NO, they have created their own products with high margins to become profitable and sustainable.
Big Basket is operating in the grocery delivery segment for over a decade, they are able to sustain because of their own procurement products which are costly compared to the DMart prices. Hence it was never a competition threat to DMart which caters affordable segment.
So the quick commerce business cannot create their own products to compete with big FMCG companies and capture market share from retailers in a long run to become profitable and sustainable.
As Investors we should focus on understanding the business models more than the financials and ratios.
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Coming back to dmart, I sometimes think what stops them from joining the quick commerce bandwagon? Any company into retail can spend some bucks and do what the quick commerce people are doing…some of them did start for a while but soon realized something and stopped. Even the big daddy, RIL started with Jiomart online and pushed the pedal but I see more focus on their premium signature stores rather than online quick commerce now. Imagine even the cash rich disrupter big daddy remained out of the quick commerce thing…did it get afraid of competetion from blinkit or instamart? I dont think so…All these players thought something and took the decision they took. I see only The Tatas as one big player with vision into probably quickcommerce via Bigbasket. This again happened via acquisition. I was naive and was not so pleased at that time that acquisition did not happen via Trent. Glad now it happened outside of Trent.
So point its, the day Dmart want to change the switch, use its dmart ready network and do a bit of quickcommerce it can do that or maybe start with a smaller player acquisition etc. but it does not want to do it. It did try the hybrid model via dmart ready which may not be serving big purpose now but it maybe giving them some idea about the data which these quickcommerce people narratives have. With the cluster based approach of dmart, they maybe as close to your house as a quickcommerce warehouse one day…
Will this strategy be detrimental over long run? Here trust factor works. Trust on management, promoters and the minds running the show…as honestly no one else knows nothing, including me 
Disc. Invested hence biased. Trent is largest hilding, Dmart in top 10. Views only for learning and not a buy/sell recommendation. I can be wrong in all my assessments.
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Excellent post. Can you pls provide more details on the big basket quickcimmerce strategy and how diffrerent it is as compared to blinkit/instamart?
Also, I did see Zomato started posting profits. If margin so low, how are they turning profitable? What mist be actual intent for Zomato to acquire blinkit if they knew 30% margins they unable to survive how will they do in lower margin business?
Trying to play devil’s advocate to understand things better and see how real is quick commerce threat, if at all it is.
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Big Basket has both 2 hours to 1 day delivery and quick commerce, each segment has its own customers who are loyal to their quality products and never mind paying high price for the quality and convenience. It took more than 10 years for them to build this customer loyalty.
In case of Zomato, Swiggy and other startups funded by VC the strategy is to pump up the valuations and eventually take exit, they will do anything it takes to reach their target.
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Jiomart online did not start as quick commerce but free home delivery. Sometimes it used to take days for the product to be delivered home. But recently (article says from June) they too entered in quick commerce and they charge a small fee for this quick delivery.
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Dmart can join hands with zepto,
To be honest, I am still not convinced about the whole blinkit n instamart thing
Its more like a premiumization play,
The way they r charging platform fee, now even i have stopped ordering and started visiting nearest grocery shop.
Both models will work parallelly,
Lets see how things span out
Its just consumer demand bit slow …may be coz of election n heavy rainy season.
Disc: not invested, but now looking at the correction, thinking
The amount of cash being pumped into QC and new expansions into electronics, garments, and other sectors…this is beyond grocery only right now,
One of the key points of friction, people see with offline is traffic and parking hassles. So top 10 cities QC may have a future. Of course pricing will be increased once they build an base.
Zomato is now taking a flat order fee of Rs.10 for food delivery. Is there a day when QC guys charge, let’s say, Rs 10 for orders below 500 and 20 above 500? Will approximately 5 Million families living in these top 10 cities pay these charges? Also, what stops Zepto or Blinkit or Swiggy from adding 3-hour or 6-hour delivery for free?
Also, for D2C and regional brands, QC offers a quick and easy method to get into affluent and UMC/MC homes without the 10-year gamut of building an Offline base and distribution network. Will they consider the ad spends and listing fees worth the hassle?
All these will determine who wins. I see an intense battle in which none of the incumbents, from DMart to Reliance to Tatas, no one will stay on the sidelines.
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