Final Project 2018

Report On

‘‘A STRATEGIC ANALYSIS OF BEST BUY, DMART &

BIG BAZAAR”

Submitted in Partial Fulfilment of the Requirement of “Master in Management

Studies” Approved by AICTE/Mumbai University

Submitted By

KSHITIJ KALANI

MMS C-325

2016-2018 (FINANCE)

Under the Guidance of

Prof. Dr. Nigel D’Silva

Student of
“N. L. Dalmia Institute of Management Studies & Research”
 CERTIFICATE

This is to certify that Mr. Kshitij Kalani (325), student of N. L. Dalmia Institute of Management
Studies and Research, has successfully carried out the project titled “A Strategic Analysis of
Best Buy, DMart & Big Bazaar” under my supervision and guidance as partial fulfilment of
the requirements of MMS course, Batch 2016-2018.

Project Guide

Prof. Dr. Nigel D’Silva

Director

Prof. Dr. Raja Roy Choudhary

Date:

Place: Mumbai

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 DECLARATION

I, Mr. Kshitij Kalani, student of N. L. Dalmia Institute of Management Studies and Research,
Mumbai, hereby declare that the project titled “A Strategic Analysis of Best Buy, DMart &
Big Bazaar” is the record of an authentic work carried out by me during the Academic Year
2016-2018 and the information provided in this study is authentic to the best of my knowledge.
This report has not been submitted to any other university or institute towards an attempt has
been made by me to provide all relevant and important details regarding the topic to support
the theoretical edifice with concrete project report evidence. This will be helpful to clean the
fog surrounding the various aspect of the topic. I hope that this project will be beneficial.

Place: Mumbai

Date:

Mr. Kshitij Kalani

325
MMS 2016-2018

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 ACKNOWLEDGMENT

It is with deep satisfaction and immense pleasure that I am presenting this project report on

“A Strategic Analysis of Best Buy, DMart & Big Bazaar”

I would like to extend my sincere gratitude and appreciation to my project guide Prof. Dr. Nigel
D’Silva who initiated me into this project.

It has indeed been a great experience working under his guidance during the course of the
project. I would like to thank him for his valuable advice and support throughout this project.

And last but not the least I would like to thank the Head of Dept. Prof. Dr. Anil Gor, the Director
Prof. Dr. Raja Roy Choudhary, all the faculty members and staff of the institute for their help
in making my project a great learning experience.

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 TABLE OF CONTENTS

Sr. No. Particulars Pg. No.

1 Certificate ii
2 Declaration iii
3 Acknowledgement iv
4 Literature Review 1
5 Executive Summary 3
6 Methodology 4
7 Best Buy Introduction 5
8 Best Buy Operations & Strategies 6
9 Best Buy SWOT Analysis 10
10 Best Buy Financials 12
11 FMCG Industry in India 13
12 Dmart Introduction 15
13 Dmart Strategy 18
14 Big Bazaar 21
15 Big Bazaar Operations & Strategy 26
16 References 30

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 LITERATURE REVIEW

ECONOMETRIC METHODS IN STAPLES

- Orley Ashenfelter, David Ashmore, Jonathan B. Baker, Suzanne Gleason & Daniel S.
Hosken

This paper discusses how econometrics played a major role in the investigation and litigation
of the Federal Trade Commission’s (FTC) successful challenge to the proposed merger between
two office superstore chains, Staples and Office Depot. It describes the econometric issues at
stake in evaluating the FTC’s central claim that the price charged by office supply superstores
was related to the number and identity of superstore firms participating in the market.

This paper also describes and evaluates modelling choices that appeared to have substantial
influence on the empirical results.

SUPERSIZE IT: THE GROWTH OF RETAIL CHAINS AND THE RISE OF THE “BIG-
BOX” RETAIL FORMAT

- Emek Basker, Shawn Klimek, Pham Hoang Van

This paper documents and explains the recent rise of “big-box” general merchandisers. Data
from the Census of Retail Trade for 1977–2007 show that general-merchandise chains grew
much faster than specialist retail chains, and that general merchandisers that added the most
stores also made the biggest increases to their product offerings. This paper explains these facts
with a stylized model in which a retailer’s scale economies interact with consumer gains from
one-stop shopping to generate a complementarity between a retailer’s scale and scope.

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BIG FISH, SMALL SEA: BIG COMPANIES IN SMALL TOWNS

- Christyne J. Vachon

This paper states that impacts of the big fish coming to the small sea cannot be labelled as
completely destructive to the community or to local business. Instead, the impact is a hazy
picture. The small community, however, should act proactively to manage the situation to its
advantage.

This article has set forth the landscape of the small communities and characteristics of the big
businesses. In particular, its analysis of studies of the impacts of the big businesses shows that
the impact on small communities can become a force that is not all bad and that can be managed.

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 EXECUTIVE SUMMARY

Best Buy, DMart & Big Bazaar are three large departmental store chains in the world. They
primarily focus on selling Fast Moving Consumer Goods (FMCG), electronic items, gadgets &
consumer durables etc.

Best Buy is one of the largest store chains in United States of America. It primarily deals in
electronics & FMCG goods. It has a large presence in the physical store space with its stores
interspersed throughout USA & Canada. It ran into losses a few years back but has successfully
managed to turn itself around in growing competition scenario across the globe. Its primary
competitors include Walmart, Costco & others in the physical store sector & Amazon etc. in
the e-tailer sector.

Dmart & Big Bazaar are India’s two largest behemoths going toe to toe in the FMCG &
departmental store space. Both have large physical stores taking huge areas in various malls &
standalone centres across the various tier I, II & III cities. Aggressive prices & discounts, large
variety & selections & convenience are some of the factors which make these stores popular
among the retail consumers.

We will discuss the stores’ strategy, planning, execution as well as financials of the past few
quarters to see where they stand. We will also explore the FMCG sector as a whole in India to
take a look at the broader picture.

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 METHODOLOGY
In order to understand a superstore or hypermarket company, it is necessary to know what is
happening in that particular sector, what are the growth drivers for that particular sector & the
economy. It is also necessary to understand how the governments is working towards the
growth of that sector. It is also important to understand how these hypermarkets are governed
differently and how the regulators ensure that the traditional retailers function properly.

All these information is collected through various journals, periodicals, research papers and
newspapers. Graphs have been used to show information wherever necessary.

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 BEST BUY

Best buy is a leading supplier of technology merchandise, services and solutions. It offers
professional services of value over to the customers and business, with annual sales being 1.5
billion times. 70% of USA lives within 15 minutes of a Best Buy store in USA. Best Buy offers
value added services like Geek Squad Agents and the customers can also use BestBuy.com or
the Best Buy app to shop the products. Best buy also has presence in Canada & Mexico in form
of physical stores or online presence.

History:

 Best Buy was founded in 1966 in name of Sound of Music by Richard and Gay Smoliak.
 The company was listed on New York Stock Exchange in 1987.
 In 1990s, it hit $ 1 billion revenue mark.
 The company launched it “Concept III” & “Concept IV” stores, which had different
open layouts, spacious interiors, & comparatively large floor space.
 The company was selected in Standard & poor’s S&P 500 index in 1999.
 In 2000, the company launched www.bestbuy.com
 In 2003, the company expanded first time outside North America, in Shanghai, China.
It also crossed 600 store mark in the same year & launched loyalty program the same
year following months of testing.
 The company’s stock reached all time high of 59.5$ in 2006.
 Best Buy started selling musical instruments in 2008, becoming one of the largest
musical chain stores in doing so. Best Buy would also become the first 3rd – party retail
store to sell the just launched iPhone.
 Best Buy Appointed 25 year experienced employee as CEO Brian Dunn in 2009. Under
him, Best Buy started operational Europe with the store opening in UK.
 Hubert Joly was named the CEO on 2012. The company slowly started exiting the
European consumer electronics market, selling its assets.
 The company’s sales declined for 10 consecutive quarters till 2014, as competition
increased from online retailers.
 The company shutdown 250 standalone Best Buy mobile stores in 2018.

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 OPERATION & STRATEGY

Best Buy's management remains prudent about its fiscal 2019 outlook, even after the
exceptionally strong end to FY18. Even allowing for the shift of the Super Bowl and a change
in the product cycle, expected same-store sales growth of flat to 2% does not reflect the idea of
a strong market. The biggest challenge is in its appliances division, where market-share gains
are available, but this division still makes up less than 10% of company revenue. Appliances
market share of only 12% lags behind electronics categories, where it's 30% or more in the case
of competitors.

Highlights from recent results:

 Appliances lead U.S. store sales gains as all categories expanded for third successive
quarter, aided by better availability and increased stock investment
 Online reached 20% US sales total on a higher conversion rate, increased average order
value
 Compensation cost increases constrained US EBIT margin, even on strong sales, while
gross revenue remained flat
 Reduced tax rate of 25% is main factor in raised FY19 eps guidance of 9-13% growth.

The favourable product cycle at the end of 2017 has likely helped Best Buy's revenue while its
exclusive Blue Label products, in categories such as computing, improve its competitiveness in
the promotional peak season and maintain margin. In 2018, Best Buy will need to build its
market share in appliances, still a very strong category but which accounts for only about 10%
of the company's sales. Appliances are needed to balance the continued decline in
entertainment-software sales.

Connected home is likely to be a strong category for Best Buy, although it will require a
different, more-expensive sales process that involves in-home consultations from more than
1,500 dedicated staff and subsequent installation. Consequently, connected home may be more
protected from online-only retailers.

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The general consensus is that same-store sales growth would remain moderate in-line with
management. The product cycle has remained strong in the country. U.S. Consumer electronics
sales have had their best year since 2015. The last quarter earnings are below pre-2012 peak
levels however, despite Best Buy being more astute with planned promotions.

Tax charge should fall to new rate of 21% from 35% in the Trump regime, potentially allowing
2019 consensus EPS estimates to increase further & allowing the company to expand or to
spend more resources.

Key takeaways from management commentary include:

1. New product development growth was flattish during the quarter, underscoring Best
Buy’s share capture in core consumer electronics.
2. The smart home category saw good growth in both voice devices (e.g., Echo) and
applications (e.g., security cameras and doorbells), which they believe shows the long
tailed nature of the adoption trend.
3. Best Buy is modelling the gaming category negative, though mobile is expected to post
modest gains with enduring strength in PC, appliances, and smart home.
4. Management believes that strength in appliances, PC, smart home, and reasonable
comps in mobile and home theatre will allow them to have the good half, (with gaming
modelled down).

Best Buy is justifying its role as the last surviving electronics specialist, emphasizing its service
and new technology availability to bring customers back. The company has defied industry
weakness by emphasizing leading technology in categories such as TVs, where Best Buy is
moving onto next-generation OLED. There is more potential in the current flow of new
products - virtual reality, drones - than for several years, while Best Buy is still expanding in
more-stable appliances. Thus, Best Buy is defying the weak market.

Virtual Reality could revive dull Best Buy Sales. Virtual reality devices, drones and a new
generation of high-definition TVs could provide Best Buy with some relief from recent anaemic
new-product development, with even the Smartphone cycle seemingly having peaked. Initial
sales suggest that virtual reality is so popular that retailers may be placed on stock allocation,
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which could favour established electronics chains. Specially purchased unique inventory is now
central to Best Buy's approach to promotions, improving its competitive position.

New products drive sales at Best Buy, as at all electronics retailers. The Nintendo Switch,
launched in March, was a rare out-of-the-box success that lifted revenue, together with delayed
tax-refund checks. There's hope that more complicated connected home products will provide
even more impetus as Best Buy can advise on which products to buy, and then install them, a
competitive advantage over online-only retailers. Best Buy continues to gain market share in
Appliances, although at only 10% of its revenue, it's underrepresented in the category.

Best Buy's potential to extend its recovery lies in making its stores relevant while recognizing
that online shopping is an increasingly important channel. The next stage of recovery will
require the company to gain greater share in services as consumers’ purchase connected home
devices yet need help to make them work. The new-product pipeline, the most important sales
driver in electronics, is sparse, although the next iteration of smart phones and games consoles
may stimulate sales.

Continued stagnation in the electronics market has Best Buy again focused on capital returns,
with the quarterly dividend increased 21% and a new $3 billion share repurchase announced.
"Best Buy 2020: Building the New Blue" is the next phase of the company's strategy. It will
reflect the need to be price-competitive in a market with fewer sales catalysts, while trying to
shift Best Buy's business model further into online selling and providing inhome services for
technology.

More focused buying, with unique products purchased for promotions, has allowed Best Buy
to take more control of its destiny in the peak period. In electronics retail, this extends through
January. Competitive pricing has become a prerequisite to competing in the sector. Electronics
was an early growth category for online-only retailers, initially leaving Best Buy exposed. The
combination of in-store marketing with vendor support and a stronger web presence has allowed
the company to build these revenues.

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Best Buy is eking out sales gains with improvements at core categories computing and mobile
phones and consumer electronics, which together account for almost 80% of revenue. New
categories, especially in health and wearables, spiced sales, offsetting weakness in gaming and
handsets. The iPhone 7 launch may have corrected that, and in the longer term, virtual-reality
devices could provide a much-needed new electronics category. Appliances are improving,
though market share trails Home Depot and Lowe's.

Best Buy is challenged by the weak electronics market while its participation in the more robust
appliance segment remains limited. The rollout of the Pacific Kitchen & Home stores-within-
a-store underpin attempts to build in this category. Online sales are expanding as Best Buy has
lowered its pricing and its main online-only competitor, Amazon, has lost its sales-tax
advantage in most states. Best Buy's focus is cash generation to support the raised dividend and
complete its $1 billion in share buybacks.

Best Buy's disappointing holiday sales reflect consumer electronics market weakness (NPD
industry data included in the release shows a 4.8% decline) and a slow period for mobile phones.
Best Buy's relatively weak position in appliances, only 10% of sales, means that revenue
increases in this category have little effect on total sales. Building sales in this more stable
segment is increasingly urgent as the new product pipeline, which drives consumer electronics
sales, remains thin and transitory.

Best Buy's third quarter, which included the important back-to-school season, seems to have
been low key, so the focus will be on the company's efficiency program and online
development. The outlook for the holiday period, which appears set for significant discounting,
will be crucial, while the depth of Best Buy's inventory may be a concern. The company is
better prepared with promotional plans than in the last two years, so it shouldn't just be
following the pricing decisions of Web and store competitors.

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 SWOT ANALYSIS
STRENGHTS

 Reputable brand name

 Expansive store coverage

 Largest electronic retail store

 Customer centric model

WEAKNESS

 Unclear mission and vision

 Weak presence in international market

 Appliance sales revenue are low comparatively.

OPPORTUNITIES

 Large demand for products

 Potential for international expansion

 Decreasing power of products leading to increase in purchasing power

THREATS

 Online stores

 Music piracy

 Strong price competition

 Increase in cost of doing business

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Strategies:

Short term Strategies:

Increase service categories' contribution in revenue mix

 Underutilized service category

 Since, Geek Squad acquisition, service sector is still at 6-7%
 Advertise geek squad services
 Strengthen Best Buy’s commitment to excellent technology support services

Long Term Strategies:

 Forward Integration: Can follow Amazon’s Locker footsteps

 Physical Expansion of Stores: Improve physical stores and online reach to improve
market share
 Long Term Contracts with Suppliers: Best Buy should have long term contracts with its
suppliers such as Apple and Samsung

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 FMCG INDUSTRY IN INDIA

FMCG has revival on the cards with rural growth remaining the key. In FY18, the FMCG
universe reported an aggregate revenue, EBITDA & PAT growth of 11.4%, 21.6% and 31.5%
respectively (two-year CAGR of 6%, 10% &12%).

Revenue growth this year was supported by

1. Gradual normalisation of the wholesale channel post the GST-led disruptions.

2. Rural growth showing some improvement after being subdued in the past several
quarters due to drought/ demonetisation/GST
3. Price cuts across categories post GST aided volume uptick to an extent and
4. Newer launches and higher Ad spends strengthened brand visibility and did give some
fuel to volume growth recovery

Post GST, companies have revised their MRPs and passed on the benefits to the final
consumers, hence no further pricing actions were undertaken this quarter (apart from GST
induced revisions in November). Also stability in input costs did not necessitate material pricing
actions. In aggregate, gross profit for our coverage universe increased by 14.5% YoY during
the quarter led by stability in input costs like Flour, Sugar, Milk, SMP, etc.

Key triggers in FMCG market going forward:

Rural growth remains the key:

In 3QFY18, most companies witnessed higher rural growth than urban. Managements have
highlighted that the rural economy is on the growth path again and they are seeing an uptick in
demand. Going forward, companies expect this growth to sustain on the back of higher MSPs,
increased government stimulus and normalisation of the wholesale channel that largely services
the rural sector.

Age-old FMCG distribution seeing a change:

Despite the wholesale channel showing gradual improvement, companies still foresee a large
section of the channel to eventually phase out of business given that they used to run on wafer
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thin margins by avoiding tax. In light of this, companies are increasingly focusing on other
channels to ensure proper availability of products. They are increasing their direct distribution
coverage every quarter. Many are also turning to B2B wholesale giants, such as Metro, Cash &
Carry and Walmart, to tap into the growing hotels, restaurants and catering segment.

New launches to keep advertising spends elevated:

In the past year, companies had held back their advertising spends and postponed the rollout of
new launches given the uncertain trade/demand scenario. However, in the past couple of
quarters with improving market environment, advertising spends have seen an uptick.
Companies have lined up a number of newer launches in the ensuing quarters with a focus on
innovation and remaining ahead of competition. In light of this, advertising spends is expected
to remain elevated going ahead.

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 D-MART INTRODUCTION

Avenue Supermart Ltd (D-Mart) is an emerging supermarket chain with a presence in 45 cities
across India. Its major presence is in the states of Maharashtra, Gujarat, Telangana and
Karnataka. D-mart opened its first store in 2002 and it has 118 stores at present with a retail
business area of 3.59mn sq ft.

D-Mart operates most of its stores in densely located areas and focuses on customers in the
lower and middle class segment of the society. D-Mart provides lower prices for its products
across various categories and sub-categories which is appealing to the price sensitive section of
the society. In order to minimize operational costs, the company follows an ownership model
(including long term lease contracts where lease period is 30+ years) rather than a rental model.
With its value positioning and demonstrated ability of adding profitable stores Dmart is well
placed to grow in large grocery retail market.

Equity shares 624 mn

52-wk High/Low Rs1,289/559 Rs1,289/559
Face value Rs10
M-Cap Rs755bn/$11.8bn
3-m Avg volume $11.5mn

Sales & Growth:

DMart registered sales Cagr of 36% over FY13-17, which can be attributed to: 22% Cagr in
average retail area, 6% Cagr in transactions per store, and 8% Cagr in transaction size. Going
forward, as existing stores mature, expect DMart’s stores to face physical constraints wherein
crowding would affect shopping experience and hurt footfall growth. Assuming 15-20 billing
counters per store and 3 minutes per transaction, a DMart store can process 3,600-4,800
transactions in a 12-hr working day. With average transactions per store already at 2,582 in
FY17, it is difficult for an existing store to support more than 3-6% Cagr in the number of
transactions.

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Physical store constraint has already driven DMart to extend store operations to 15 hours per
day at some locations vs. 12 hours earlier. If we assume 15 hours as the standard operating time
for all stores, a 10- year Cagr of 6-9% in transactions per store is possible. In addition, growth
in transaction size (8% Cagr over FY13-17) should moderate going forward and converge with
inflation as stores achieve maturity.

Further, contribution to growth from store addition is likely to taper as the base becomes larger.
Ramping up store additions sharply would also be difficult, given around 10-15 permissions

needed for a new store and difficulty in finding the right location at an attractive price. This
was evident in the moderation in store addition seen in 9 months of FY18.

The ‘Everyday low prices’ provide higher volumes by catering to all classes of society. Average
bill value of a DMart store is 10-20% cheaper than mom & pop and other modern trade stores.

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On average, a DMart store caters to 0.3mn families in its catchment per month, driving 12x
inventory turns. However, the throughput and margins of stores tends to fall in smaller cities -
revenues per sq ft CAGR 2% over FY12-17.

Competitive intensity likely to increase going forward:

Aggressive sales growth assumptions also under-appreciate the likelihood of an increase in

competitive intensity from existing national brick-and-mortar chains like Big Bazaar, regional
players as well as e-commerce majors. Further, competition would come in from foreign players
like Walmart if FDI in multi-brand retail is allowed going forward.

Online retailers such as Amazon and Big Basket also remain a credible competition for DMart.
Amazon has been aggressive in the grocery segment globally (acquisition of Whole Foods) and
has already launched ‘Amazon Pantry’ in India to tap this segment. Moreover, in an aggressive
bid to acquire customers, Amazon has started a ‘Super Value Day’ programme, which offers
higher discounts on grocery purchases made on the first two days of every month.

Further, Chinese major Alibaba Group is also set to foray in the Indian grocery market through
a USD300m investment in Big Basket (CCI approval for this transaction is already in place).
In the past the Chinese retail market also saw high competitive intensity and emergence of
several strong regional players. This in turn led to a fragmented market with top 10 grocery
retailers accounting for 22% market share. The Indian market is likely to follow a similar
trajectory and would see emergence of several strong players in the retail market.

Operations:

DMart borrows many of Walmart’s principles - operational discipline (a science) and product
mix (an art) - and customizes them for India. Real estate ownership must not be confused with
inherent operational strength which delivers returns (15%) that are 2x rental yield on property.
Cost discipline is evident from low fixed/central costs (2% of revenues) and culture of
inclusiveness (stock options). Capabilities of assortment management are evident in range and
mix of inventory catering to a large customer base. Accelerating store addition on own store
model is challenging, plus stores in smaller towns may have lower throughput and, hence, lower
margins. It is on track to have786 stores by FY30 and double of payable days to 15 with a
WACC of 11.5%.
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 HOW HAS DMART SUCCEEDED – THE
STRATEGY:

The science and rigor of processes to maintain low cost help DMart offer low prices. DMart’s
key margin driver – general merchandise and apparel - has low ticket size, triggers impulse
purchases, is utilitarian and competes with the offerings of unorganized players. However, its
ecommerce business would be margin dilutive as it is skewed to FMCG/food, which offers 3%
gross margin vs store-level gross margin of 15%.

DMart’s location strategy is akin to that of a convenience store but with the size of a
supermarket. This coupled with focus on inventory turns and low costs helps it drive 3x asset
turns despite owning the properties. As DMart’s reputation grows, developers will likely opt to
either sell land to it or offer attractive long-term rentals as this will enhance the property value.

DMart is a convenience store – a bigger and better one. DMart’s average store size of 31,298
sq ft may lead one to believe that it’s a conventional Indian supermarket situated in a mall.
However, DMart’s store locations are in and around residential areas akin to a convenience
store. Conglomerates which have attempted convenience stores have adopted small sized stores
yet have lesser throughput than DMart. DMart’s size offers the assortment of a supermarket –
the best of convenience as well as product range from a customer perspective. This makes it
stand out in an over-retailed market (by mom and pop grocery stores) where there is a shop for
every 15 families.

DMart is a mid-sized convenience store with the right assortment DMart is a convenience store
with most stores located in residential catchments rather than shopping malls. This coupled with
a larger range of offerings due to its size of 31,000 sq ft vs 2,000-5,000 sq for convenience
stores means higher footfalls attracted by a wider assortment of products. The wider assortment
allows it to sell higher-margin general merchandise and apparel while offering lower prices on
staples.

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“Our stores are typically located in densely populated residential areas and neighbourhoods
keeping in mind accessibility and potential for future development. Sales are derived, in part,
from the volume of footfalls in these locations.”- IPO Prospectus of Dmart

Small box convenience stores have failed as the assortment is restricted to relatively low-margin
FMCG and fresh produce. DMart offers assortment across categories, ranging from FMCG to
general merchandise. This coupled with a neighbourhood location drives footfalls to an offering
of discounted staples and general merchandise/apparel to the masses. The result is a higher
share of general merchandise and apparel (25%) than convenience store players (5-10%).

We should not confuse operational brilliance with rental savings - DMart’s operational
efficiency is irrespective of owning the property. The value addition can be gauged by the fact
that the EBITDA it generates is ~3x that of the notional rental yields of 15% on property at
book value. Despite owning the property, it delivers 5x fixed asset turns and 3x asset turns due
to strategic choice of location and focus on fast selling SKUs.

Real difference is in working capital turns. Unlike peers, DMart focuses on maximizing
working capital turns through inventory days and not creditor days. The cash discount from
paying creditors earlier than industry standards is passed on to consumers as lower prices, which
in turn drive inventory turns. DMart has the lowest inventory as well as creditor days but the
outcome is that its sales per sq ft is the highest (1.5x that of nearest peer).

A DMart store caters to people from all economic strata of the society. Given its assortment
(75% is FMCG and food) and lowest pricing amongst peers, local or chain, it attracts almost all
households in a catchment. An average store caters to over 2500 customers a day, which implies
that it caters to ~0.3mn households a month in its catchment. This focus on demographics over
wallet share is DMart’s biggest competitive advantage, providing high volumes with lower
basket size. And as these customers uptrade, DMart’s basket size too gets upgraded while
remaining cheaper than peers.

The average bill value is 15-20% lower than general trade. DMart’s main competition is the
general trade, or mom and pop stores, in a micromarket. When a customer shops for her
household basket of food and FMCG at DMart, he/she saves 15-20% over the general trade,
which sells at MRP.

Also, every invoice at DMart highlights how much the customer has saved on MRP. DMart’s
low pricing of essentials, utilitarian assortment in general merchandise (e.g. gas cylinder

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trolleys, household utensils) and mass market fashion (maximum price not more than
`500/garment) appeal to even the lowest economic strata.

DMart is cheaper than ecommerce players. For a like-to-like basket, DMart’s store as well as
ecommerce prices are lower than those of ecommerce players such as Big Basket and Amazon.
Moreover, DMart offers the convenience of being present in a neighborhood through its store
or kiosk. DMart’s ecommerce offering is a ‘click and pick’ offering through multiple pick-up
points (PuPs). It currently has 45 PuPs primarily catering to locations where there are no DMart
stores, and delivery is charged at `49 or 3% of order value above `1633. Moreover, PuPs exist
only in cities where DMart has stores, which optimizes distribution costs.

DMart is on a growth and expansion path, and in the coming years, it can be the Walmart of
India.

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 BIG BAZAAR

Future Retail (Big Bazaar) is the flagship company of Future Group, India’s retail pioneer
catering to the entire Indian consumption space. Through multiple retail formats, they connect
a diverse and passionate community of Indian buyers, sellers and businesses. The collective
impact on business is staggering: Over 330 million customers walk into their stores each year
and choose products and services supplied by over 30,000 small, medium and large
entrepreneurs and manufacturers from across India. This number is set to grow.

FRL is promoted by Kishore Biyani, who has been a pioneer of retailing in India. He started
his journey by opening 8,000 sq ft Pantaloons store in Kolkata. In 2001, he launched large-
format hypermarkets under Big Bazaar and expanded it rapidly, to reach 116 stores by FY09.
The promoter group has forayed into multiple specialised retail formats across Food and
Grocery (Food Bazaar), apparel (Central, Pantaloons and Brand Factory), electronics (EZone,
Electronics Bazaar), home furnishing (Home Town, Collection, Home Bazaar), Furniture
(Furniture Bazaar) and franchisees (KB’s Fairprice).

It has also invested in private brands across product categories such as food and FMCG (Tasty
Treat, Fresh n Pure, Cleanmate etc.), apparel (John Miller, Indigo Nation, Jealous 21, Lee
Cooper etc.) and home products (Mother Earth). The group also incubated businesses in other
sectors such as financial services (Future Capital Holdings), insurance (Future Generali, JV
with Generali Group of Italy), supply chain solutions (Future logistics), Media (Future Media)
etc.

Following the economic downturn in 2008, the group underwent a series of restructuring:

• In Jun-12, the group sold its 54% stake in Future Capital Holdings (renamed subsequently as
Capital First) to Warburg Pincus.

• In Nov-12, the fashion and apparel business of Future Ventures and Pantaloons Retail
(Central, Brand Factory, All Planet Sports) was demerged into Future Lifestyle Fashions (FLF).

• Future Ventures (private food and FMCG space brands) was thereafter renamed as Future
Consumer.

• In FY13, Future Group divested the Pantaloons Retail chain to Aditya Birla Group and the
remaining entity was renamed as Future Retail.
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• In FY16, Future Retail merged with Bharti Retail to acquire EasyDay small stores in lieu for
stake in Future Retail. The company subsequently was split into Future Retail (pure customer
facing retail business) and Future Enterprises.

• In Nov-16, Future Retail acquired the retail business of Heritage Foods in a share swap deal.

• In Apr-17, Future Retail demerged home retail businesses (HomeTown and FabFurnish online
business) into Praxis Home Retail

• In Oct-17, Future Retail acquired Hypercity stores from Shoppers Stop and Raheja Group.

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Future Retail (FRL), one of the largest retailers in India, operates 14m sq ft across 300 cities
primarily in the hypermarket and smallstore formats. Expectations are 17% sales Cagr over
FY18-20 given:

1) continued benefits in the key Big Bazaar format from investments in product/productivity
measures;

2) acquisition of Hypercity;

3) aggressive expansion in small-store Easyday format; and

4) strong demand in the value fashion segment. Ebitda margin should benefit from operating
leverage gains, GST-led productivity benefits, and turnaround of the Hypercity/loss-making
Easyday formats driving 31% Ebitda Cagr over FY18-20.

Equity shares 502 mn

52-wk High/Low Rs 659/241
Face value Rs 10
M-Cap $3.83bn

Operations & Strategy:

Future Retail (FRL) is a leading player in organized retail in India operating 974 stores with a
retail area of c14m sq. ft. It operates seven key formats:

1) Big Bazaar hypermarket format;

2) Hypercity stores acquired in Dec-17;

3) EasyDay and Heritage convenience stores;

4) standalone FBB apparel stores;

5) FoodHall gourmet food/ FMCG retail;

6) E-Zone electronics retail; and

7) HomeTown home retail business (demerged into Praxis Home Retail in Nov-17).

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FRL operates an asset light model with all store area leased from third parties and retail
infrastructure leased from Future Enterprises. Private label brands are sourced from group
entities such as Future Consumer, Future Lifestyle Fashions (FLF) and Future Enterprises. It
focuses its energy on maintaining store inventory and running day-to-day operations.

Big Bazaar (hypermarket format) is the largest format for FRL with 259 stores (11m sq ft)
across 131 cities in 26 states. Apart from food and grocery, fashion and apparel accounts for
35% of Big Bazaar sales and is a key margin driver for this format. FRL also operates 59
standalone FBB apparel stores across 36 cities in 18 states. These stores are located in areas
where a full-fledged Big Bazaar store is not viable.

Other formats of FRL include

1) FoodHall gourmet food/ FMCG retail (9 stores); and

2) E-Zone electronics retail (consolidated to 17 stores from 87stores in FY17).

FRL has also entered into the small store format through acquisition of Bharti Retail stores and
retail outlets of Heritage Foods. It currently operates 611 Easyday stores under this format. It
has also expanded presence in hypermarket format through acquisition of 19 Hypercity stores
in Dec-17 from Shoppers Stop and Raheja Group.

Under its Vision 2047, Future Group intends to grow 20% Cagr over next 30 years to become
the first trillion-dollar consumer business in India. With FRL being the largest company in the
group, such growth would need to be led by this entity. Further, the group also targets to be
among the top three global fashion companies and top ten global food and FMCG companies
by 2047.

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 STRATEGY TO SUSTAIN THE GROWTH

FRL has 259 Big Bazaar hypermarket stores as of Dec-17 (10.7m sq ft) across 131 cities. Big
Bazaar retails food and FMCG products (65% of sales) along with apparels. Apparel sales are
largely through private labels and even in the consumer segment, it sources private labels like
Golden Harvest, Fresh & Pure, Sunkist etc. from Future Consumer. It is among the largest
modern retail chains in India. We believe Big Bazaar accounts for 75% of FRL sales.

Over the last few years, FRL has worked on slowly improving the positioning of its fashion
portfolio towards a value focus. Under the new positioning, FRL has placed FBB at a level
higher than traditional value players like V-Mart, 1-India Family Mart etc. and similar to
Reliance Trends. As a part of this change in positioning, FRL has invested in improving its
product assortment primarily in the apparel segment. FRL has also invested energies in
enhancing the non-apparel part of the portfolio. Further, in order to improve store and supply
chain efficiencies, FRL has developed depth across each vendor by reducing the number of
vendors. Further, to improve store efficiency, FRL reduced the number of SKUs and reduced
the non-retail area for both fashion and non-fashion products. It invested in 24-hour store
servicing which allowed better store utilization levels (fashion products come already labelled
and organized/ food products are prepared at night etc.).

These initiatives have helped drive pickup growth across the Big Bazaar format to 14-16%
levels over the last six quarters. Big Bazaar format growth would continue to benefit from these
initiatives going forward. Further, GST implementation, in particular, the introduction of a
lower rate for apparels priced below Rs1000, has enhanced price competitiveness of value
fashion products. Further, FRL intends to increase current 259 stores by 25 stores annually (24
stores added in 9mFY18) which should help drive 15% sales Cagr over FY18-20 in the Big
Bazaar format. With high margin private label apparel segment likely to witness stronger
growth, the gross margin should expand going forward. Further, operating leverage gains
should drive steady margin expansion and in turn 23% Ebitda Cagr over FY18-20.

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Hypercity turnaround to aid performance:

FRL acquired 19 Hypercity stores (average 70,000 sq ft store area) from Shoppers Stop and its
promoters in Dec-17 with an intention to gain access to marquee retail locations across eight
cities. Hypercity format offers a similar portfolio of products as Big Bazaar. However, the
positioning of the format is towards a premium shopping experience similar to a Big Bazaar
Gen Nxt. In addition, the share of apparel is lower at 17% (in 1QFY18) vs 35% for Big Bazaar.

While the format is currently loss making with Ebitda loss at 4.3% of sales in FY17, FRL
expects the format to break even on acquisition. This is because FRL would not retain
Hypercity’s central warehousing and supply chain infrastructure based in Bhiwandi, Mumbai,
and instead use its existing supply chain to service Hypercity stores in Mumbai. This should
result in Ebitda margin loss reducing by 150-200bps. Further, FRL expects the corporate costs
to be 250-300bps lower as it remains particular about head office costs which are absorbed.

FRL intends to increase the share of apparel sales to 35% vs. 17% currently and the required
change in product assortment has already started across few stores. Further, apparel gross
margin should expand from the current 32% (vs. 40% for FRL) on back of assortment changes.

The Hypercity growth should steadily improve to 5/8% by FY19/20 from 1.2% in 1HFY18 as
FRL’s initiatives improve customer footfalls and conversion rates. Further, the format should
reach 6% Ebitda margin by FY20 as its initiatives to improve profitability bear fruit. Note that
full impact of Hypercity sales (5% of FRL sales) in FRL financials would reflect in FY19 with
4Q being the first quarter of impact.

In addition to selling apparel through the Big Bazaar hypermarket, FRL has set up 59 standalone
FBB stores (0.6m sq ft as of end 3QFY18) of average 10,000 sq ft across 36 cities where it sells
apparel. This helps target locations where a Big Bazaar store is not viable. These stores retail
value fashion with positioning similar to Reliance Trends and targets millennials who are
looking to upgrade from value focused options.

FRL’s decision to increase depth across existing vendors has allowed the vendor to give better
quality products at lower prices while providing a consistent product line-up. This has helped
develop a product portfolio which differentiates FRL from other value fashion players.

GST implementation has increased working capital requirement for players engaged in apparel
trade as input credit on raw materials is not received till final sales occurs. This has hurt smaller

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retailers. This along with an evolving consumer who is looking to upgrade should help sustain
healthy growth in FBB format.

FRL has started a membership service for its small stores offering customers a superior
shopping experience (WhatsApp shopping, personal ordering, free home delivery) while
offering 10% discount on key brands. It has reached 400,000 members (up 10x in CY17). FRL
intends to use data analytics to effectively target customers with promotions to increase
customer wallet share. FRL expects the membership programme to allow it to retain and gain
customer wallet share. The company targets reaching 10m members over next 3-4 years. FRL
intends to add stores in places which offer visibility of signing at least 400 members, this
ensuring a clear path towards break-even.

FRL’s acquisition of Heritage stores in Nov-16 helped gain access to:

1) a local customer base (1m customers) in the key southern cities of Hyderabad, Bangalore
and Chennai; and

2) a strong supply chain, which procured food and dairy products directly from farmers.

The company intends to building on this acquisition and focus on gaining customer wallet share,
building scale in individual micro markets and expanding presence on a cluster basis.

FRL highlighted that the EasyDay format currently is loss making. However, it expects the
format to reach breakeven on the back of ramp-up across new stores, ability to gain customer

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wallet share on the back of membership programme, increasing share of private label sales, and
benefits of operating leverage benefits.

FRL should achieve Ebitda breakeven in FY19 and 2.0% margin in FY20. However, with sub
5% growth likely from this format, FRL would need to focus on strong cost management
initiatives to generate profits sustainably.

In addition to these formats, FRL also has 17 stores of average 10,600 sq ft in the EZone format
across 9 cities, where it retails electronic gadgets and electrical applicances. It also has 9 stores
under the FoodHall format (avg 12,000 sq ft size) across 5 cities where it retails gourmet foods.
FRL also had 37 stores under HomeTown format (average 23,000 sq ft size) across 21 cities
where it retails home improvement products like furniture, tableware, home furnishing,
kitchenware etc. However, in Nov-17, these stores have been demerged into a separate listed
entity, Praxis Home Retail. Accordingly, these stores are now no longer part of FRL. This
demerger and resultant loss of sales (3%) is likely to weigh marginally on FY19 sales growth.

FRL obtained Rs18bn tax credit from merger with Bharti Retail. Further, it should obtain
Rs5.5bn tax benefits from carry forward losses at Hypercity. These tax benefits should result
in zero tax over FY18/19 with FRL likely to start paying taxes starting 1Q/ 2QFY20.

As highlighted earlier, FRL is formed by demerging the retail front end/ supply chain assets
and other investments into Future Enterprises. As a part of this demerger, FRL entered into an
agreement with Future Enterprises for leasing front end retail and supply chain for a period of
five years. This agreement is renewable for another 5 years after completion of the initial period.
An annual rental escalation of 3% is applicable for land and retail area; while store fit-outs,
furniture etc. have no escalation. This arrangement allowed FRL to use cash flow from
operations to reduce debt on books. Thus, despite FRL looking to add 1.6m sq ft in FY19 and
1.8m sq ft in FY20, capex on books is likely to remain subdued as FRL’s investments are
restricted largely to IT infrastructure.

Given a series of restructuring that FRL has carried out over the last few years since coming
out of the crisis, there is limited history to determine prior period performance of its formats.
Should the regulator not allow FRL to retain tax benefits from the Hypercity acquisition, FRL
may see a tax increase earlier than expected, which would weigh on EPS growth.

Weakness in consumer sentiment may weigh on growth and in turn earnings. Inability to turn
around small store business may weigh on FRL’s financials especially given its aggressive store
addition plans.
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 REFERENCES

Bloomberg Intelligence

Bloomberg Terminal

https://www.bestbuy.com/
www.euromonitor.com/best-buy-co-inc-in-retailing/report

https://www.cnbc.com/2017/05/25/why-best-buy-shares-are-up.html

https://www.forbes.com/.../an-analysis-of-best-buys-turnaround-and-its-plans-for-fy-2016

https://www.statista.com/topics/1881/best-buy/

http://investors.bestbuy.com/investor-relations/financial-info/annual-reports-and-proxy-
statements/default.aspx

https://www.ibef.org/industry/fmcg.aspx

www.dmartindia.com/

https://www.moneycontrol.com/news/business/earnings/d-mart-why-indias-most-expensive-retail-
stock-is-still-priced-at-a-premium-2334005.html

http://www.dmartindia.com/investor-relationship

http://www.futureretail.in/

http://www.futureretail.in/investors/annual-reports.html

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