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business.outlookindia.com Will The Real Sam Walton Stand Up?

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MAGAZINE | AUG 06, 2011

D-MART

Will The Real Sam Wal on S and Up?

RadhaKishan Damani s got the retail chain formula bang-on. But, he s not willing to air his strategy to the world.
RASHMI K PRATAP , AJITHA SHASHIDHAR

hirty-six-year-old advertising professional Subha Rao, who lives in Hiranandani Estate in Thane, Maharashtra, is

spoilt for choice when it comes to shopping. If she goes a couple of kilometres in any direction, she ll hit a multi-brand store to shop from. Rao can choose between Reliance Fresh, HyperCity, Aditya Birla More and Big Bazaar. Yet, she shuns these stores. Instead, she goes diagonally to her left and hits D-Mart, a little known, but nonetheless well stocked supermarket where she can buy groceries, vegetables, utilities and even home furnishings. The store stocks everything I need regularly, but more importantly, offers good quality products as well as good discounts, says Rao

. Although the store is now open from 8 AM, which makes it very convenient, it is still very crowded during weekends. But for the long queues at the billing counter, it is the best place to shop.
On the other hand, 30-year-old home-maker Akansha Roy, who lives in the western Mumbai suburb of Malad and is equally spoilt for choice, is not entirely in agreement. She rates HyperCity or InOrbit very high as her favourite shopping destinations. Despite this, she cannot ignore D-Mart, which is just across the road from her house because it offers the convenience of anything, anytime. When it comes to a quick replenishment of grocery items or fruits and veggies, I prefer D-Mart because it is really convenient, she says.

The smaller size of the stores forces D-Mart to only stock products that sell fast, which reduces its writeoffs on clogged inventory.

For a retailer, this certainly is the sweet spot of positioning: to be on the destination list of people like both Rao and Roy. D-Mart offers everything they need. It is only for objects of high fashion that Rao or Roy need to shop elsewhere
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business.outlookindia.com Will The Real Sam Walton Stand Up?

The nine-year old D-Mart has established itself firmly in the new retail topography of urban India because it works on a rather unique business model. The strategy is quite simple, yet it is one that, in its nuances, has helped the company achieve quick profitability; it is a concept that the big boys still wistfully sigh at. D-Mart sets up stores in dense residential complexes. So it is assured of a clientele that walks in because it wants to buy and not just browse. Secondly, the company buys these stores. It does not rent them out. This means that there will not be 1,000 D-Mart outlets in the next 12 months, but that does not matter since even the five-year olds who pop into its stores know how the story of the hare and the tortoise worked out. Thirdly, the company pays its vendors in two days and because of this the vendors are happy to sell to D-Mart at a further discount, which the store passes on to the customer

"They have the right assortment of products and are well priced. The company s got the basics of retailing right"

. The retail landscape is constantly reverberating with sound bytes from Big Bazaar, Hypercity and other giants of retail, D-Mart has quietly snuck in and settled into a niche. Its customers are value-conscious middle-class families who prefer its modestly-sized outlets to swanky malls.
Unique Strategy

. The smaller size of the stores also forces D-Mart to only stock products that sell fast, which reduces its write-offs on clogged inventory.
Thanks to these four simple strategies, this small chain, owned by stock market icon Radhakishan Damani, is a profitable ventureunlike the bleeding giants in the retail sector. In FY10, its net profit grew more than four-fold over the previous year to Rs 21 crore, on revenues of Rs 1,100 crore (65% growth). The interest on loan taken for buying property is never more than 12% to 13%, which, in the long run, will be much less than paying rentals, which constitute about 30% of the operating expenses of a retailer and keep escalating every few years. Size Does Matter D-Mart stores are much smaller in number and size compared to those of retail giants such as Future Group (Big Bazaar) Aditya Birla Group (More) and Reliance Retail "As long as there are consumers available it doesn t matter whether the store is in a mall or in the street."

D-Mart s debt at end of FY10 stood at just Rs 148 crore in FY10 the figure for rival Pantaloon Retail was Rs 4,352 crore.

. Big Bazaar has more than 200 stores across the country, D-Mart has just 46 across Maharashtra, Gujarat, Andhra Pradesh and Karnataka. The average size of a Big Bazaar store is around 50,000 sq ft; the average size of a D-Mart 8,000-10,000 sq ft. Big Bazaar stocks 3,000 to 4,000 SKUs (stock-keeping units) of merchandise; D-Mart800 SKUs. Nevertheless, it sells everything an average Indian household requires, from rubber bands and hammers to unrefined jaggery and prayer beads.
While D-Mart s debt in FY10-end stood at just Rs 148 crore, Future Group, the parent company of Big Bazaar, has accumulated debts to the tune of Rs 4,352 crore. Similarly, the Rs 1,450 crore Aditya Birla Retail, which started out in 2007, hopes to touch a revenue of Rs 1,700 crore this fiscal and is yet to break-even

. Reliance Retail, the holding company of the group s individual retail ventures has sales of Rs 290 crore and loss of Rs 190 crore on a net worth of Rs 5,715 crore during FY 10. While, consolidated sales for all retail ventures of the Reliance Group rose to Rs 4,500 crore, it made no profits.
It started operations in 2006. Damani s D-Mart, which set up its first store in Mumbai in 2002, has been profitable since FY07.

"D-Mart s strategy of buying properties at prime locations is a double-edged sword."

In the stock market, Damani is known for constantly investigating and identifying new buy and sell targets. His retail moves mirror this strategyhe believes in continuous endeavours to investigate, identify and make available new product categories for customers. But Damani is tightlipped about the specifics. I m not ready to talk about my (retail) strategy, he said
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business.outlookindia.com Will The Real Sam Walton Stand Up?

. An email sent to D-Mart CEO Neville Noronha remained unanswered.

D-Mart is the most profitable retail company in India. Its retail model has caught the attention of private equity players. Damani s retail model is quite different from the rest. He does not believe in renting commercial buildings or malls. For him, owning real estate in prime locations, with good pedestrian traffic, is the way to go. Almost 30% of a retailer s costs go towards rentals. Most Big Bazaar stores are in malls. The retailer spends close to Rs 50-Rs 60 per sq ft. Therefore, for a 50,000 sq ft store, the retailer would be spending close to Rs 30 lakh a month on rent. In contrast, D-Mart, by owning its stores, makes a huge saving on rentals. Moreover, it has chosen to keep store size smallalmost a sixth of Biyani s Big Bazaar. So, even if D-Mart was to take stores on rent, the outgo would be just about Rs 4.8 lakh per month.

Damani s strategy of owning real estate leads to a capital outflow in the beginning, but shields the company from future uncertainties. Location is an important component of retail. Therefore, if a retailer is renewing a rental lease after nine years, the owner can easily arm-twist him into paying a ludicrously high rent. D-Mart s strategy of buying properties at prime locations is a double-edged sword. While leads to a strain on cash-flows in the short run, it presents a significant upside as the areas develop and realty prices increase, says Mritunjay Kapur, Managing Director, Protiviti Consulting. While retail rentals in Mumbai have remained almost stable in the last two years, a report by real estate consultant Axiom Estates says it will not take too long for mall developers to renegotiate contracts with retailers as the retail industry is showing early signs of revival. Damani can hope to sit back and laugh when rentals move northwards. Companies such as Future are in the red not so much for their real estate strategy, but because they have expanded too aggressively, remarks a Delhi-based property consultant. Damani s conservative strategy helps him build assets on the way and remain in the black. Since the company did not go on an expansion blitzkrieg, it did not need to borrow heavily. The promoter s equity is high and debt is low, so the balance sheet can take the impact of the interest cost the company accrues to buy the stores. The Small Wonder Tho gh mall in compa i on, D-Ma ha b ig n mb e o peak fo i p ofi and a igh g ip o e deb .

Scale Versus Profits Damani has given the thumbs down to scalability for the sake of profitability. And rightly so. The first D-Mart store opened in 2002, and in the last nine years the retailer has taken the count to just 46 stores. In contrast, Aditya Birla Retail has 650 stores since its launch in 2007 (most of them were acquired when the company bought out the South India based Trinetra group) and Reliance Retail has come up with 1,000 stores since 2006. This measured expansion policy helped D-Mart fight the economic slowdown in 2008-2009 successfully. D-Mart was the only retailer that didn t close a single store. Reliance Retail, after opening 1,000 stores in 86 cities beginning 2007, had to shut down and re-size around 400 stores in 2008 as they were bleeding. ABRL shut down 160 stores while Future group had to get out of its niche format stores like BlueSky and Fashion Station to cut costs. Rapid expansion also leads to rapid losses. D-Mart is targeting not more than 10 to 12 stores a year in the foreseeable future, says a source, familiar with the company s strategy.
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business.outlookindia.com Will The Real Sam Walton Stand Up?

To Mall Or Not ? While all large retailers are counting footfalls, Damani has chosen to go in another direction. He prefers to set up smaller stores within a neighbourhood. Most malls work on a rental basis. Therefore, D-Mart, which believes in the ownership model, would not even be welcomed by mall owners. According to Harminder Sahni, Founder, Wazir Advisors, for a format like D-Mart, it s the location that matters with respect to the primary catchment, ie, people living within a 2 km radius of the store. As long as there is a critical mass of consumers available in the primary catchment it doesn t matter whether the store is in a mall or in the street. The other question one needs to ask is whether a store, not housed in a mall, would have to compromise on footfalls and therefore conversions. Not at all. One of the reasons most FMCG companies are more than eager to supply to DMart is because of its high turnaround. While inventory comprises 25% of sales for Pantaloon Retail, the number for DMart is only 6%. This shows that D-Mart has very little inventory, about 21 days, on an average, compared to 90 days for Pantaloon Retail. Limited SKUs & Higher Discounts The biggest incentive for consumers to shop in D-Mart is the guaranteed discounts. The discounts range from 2% to 10%, unlike other retailers, whose discounts are limited and never guaranteed. D-Mart may be much smaller in size and may have lesser SKUs, but they are always well-stocked. They have the right assortment of products and are also well priced. The company has got the basics of retailing right, says Pinaki Ranjan Mishra, Partner & National Leader (Retail and Consumer Practice), E&Y. The biggies seem to be struggling with these they seem to be stocking everything and yet missing out on many things. Though some consumers feel that D-Mart doesn t give them an adequate choice of brands and wider range of products such as varieties of cheese, breads, seafood and so on, the industry believes that it is prudent to have limited offerings and offer better prices instead. Damani seems to be following the Pareto Principle here focus on 80%, the most crucial of the productsand give up the 20% for which hypermarkets exist anyway. How is D-Mart able to offer higher discounts compared to the rest and yet remain profitable? The secret: unlike other retailers who work on a credit system, D-Mart believes in paying cash outright. D-Mart gets better discounts from us because unlike other retailers, they repay us within two days. That s a guarantee from them, and for us it s almost like selling for cash. Other retailers have a credit cycle ranging from 15 to 60 days, says a vendor who supplies D-Mart. The result: vendors give big discounts to D-Mart (anywhere between 5% to 12%), which the retailer passes on to consumers. Typically, the longer the credit period, the longer the vendor s working capital cycle. And he has to resort to short-term borrowings to fill the gap in cash flow. So vendors ask for higher prices to compensate for the interest burden it puts on them. But this is not the case with D-Mart. We are happy to give higher discounts to D-Mart because they not only pay us immediately, their stocks move much faster than any other retail store, remarks the supply chain head of a leading FMCG company. The discounts at D-Mart are substantially higher and we have had to tell them to cut down the discounts as it impacts sales of our products in other stores, he adds. Future hazards? Akshaya Kumar, Managing Director, of real estate consulting company, Parklane Advisors, says D-Mart has been bang on, in terms of the timing of buying property. They have bought out properties at the right time at good, competitive pricing, but it may not always work to their benefit. The D-Mart property in Malad, for instance, was bought around eight years ago, when the rates were in the region of Rs 2,000 per sq.ft. Malad was an upcoming residential area and didn t have any modern retail stores to boast off. The timing was perfect. But buying property in Malad now (it is in excess of Rs 15,000 per sq ft) to set up a store could be suicidal, explains Kumar. So if Damani has to put up another store in Malad now, the economics may not work out. And thatthe ever increasing real estate pricesremains a challenge as Damani looks to expand further. For now, the truth is that D-Mart is the most profitable retail company in India. Its different retail model has also caught the attention of private equity players. Norwest Venture Partners, Sequoia Capital, New Silk Route and HDFC Private Equity, are known to have expressed interest in the company. The Future Group, the company that set the multi-brand retail segment on a roll in the country, has accumulated debt of Rs 4,352 crore without owning properties and is still reeling under losses. Here is a company that not only makes profits but also owns its properties.
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business.outlookindia.com Will The Real Sam Walton Stand Up?

Today, the financial situation of the Future Group puts it in an uncomfortable positionit can t expand anymore, it has to improve store sales and squeeze out efficiencies to be able to repay its debt. Borrowing more to expand is not an option. In contrast, with a profitable venture in hand, D-Mart is in a far more comfortable position to expand. Whether Damani would go down that road is a question that can only be answered by time. But the fact is, he can. Biyani better be worried, Damani is coming. Click here to see the article in its standard web format

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