Copyright 2016, Forbesindia.

com

DMart: The
juggernaut continues
to roll for India's
value shop
(http://www.forbesin
dia.com/article/board
room/dmart-the-
juggernaut-continues-
to-roll-for-indias-
value-shop/48457/1)
By Samar Srivastava| Oct 24, 2017

DMart's methodical rise as India's top valued retailer has set it up for
many years of rapid growth. And the juggernaut is being steered by
Neville Noronha, the man hand-picked by media-shy founder
Radhakishan Damani
(From left) Ramakant Baheti, chief nancial o cer, Neville
Noronha, Chief Executive O cer and Managing Director, Dheeraj
Kampani, Vice President, Buying and Merchandising, Uday
Bhaskar, Chief Operating O cer, Retail, Narayanan Bhaskaran,
Chief Operating O cer, Supply Chain Management
Image: Mexy Xavier

Neville Noronha speaks with disarming candour. His answers,

delivered cogently and with precision, are indicative of someone
who has done his time in the trenches—in this case, on the shop
oor—as well as in the corner o ce where he now plots strategy
and gures out how the customer of tomorrow—and by
extension, his business—will evolve.

No wonder he is the man to whom ace investor, the elusive

Radhakishan Damani, has entrusted the task of steering the
DMart juggernaut. And it is easy to appreciate why Noronha
hasn’t let Damani, who started DMart in 2002 in Powai, down.

“I’ve learnt that big ideas don’t work,” the 42-year-old chief
executive and managing director of Avenue Supermarts, which
runs DMart, tells Forbes India. He, in fact, points out that they
can actually work against you. “Instead, the wins in retail come
from relentlessly pursuing small incremental improvements,” he
says. Noronha even contrasts this with the “MNC culture” which
focuses on the big idea and then does an average job of
execution—he’s clear that this is not something that will work in
Indian retailing. “You really need to love what you do day in and
day out,” he says, adding self-deprecatingly, “if you’re too smart,
the profession will bore you.”

It is this philosophy that has made the retail chain more valuable
than competitors Future Retail (₹25,000 crore), Aditya Birla
Fashion (₹12,000 crore) and Trent Ltd (₹9,600 crore). DMart’s
market cap, at ₹69,000 crore, is more than the combined market
cap of these three. Since its listing on March 22, 2017, its stock
price has soared by 260 percent to ₹1,110 from an o er price of
₹299.
But will the company be able to do justice to its lofty valuations?
To understand that—if the DMart of tomorrow will grow and
thrive —it is helpful to take a deep-dive into its past and track
the story of a benevolent founder who carefully studied the
business, trusted and nurtured a young management team,
invested capital wisely and patiently, and nally shared the
wealth he created with his employees.

It also helps that DMart spent the better part of the last decade
perfecting its business model. Unlike its rivals who, for the most
part, focussed on achieving scale, DMart worked on keeping
costs to a minimum and getting the per unit economics right.
“Keeping costs in check has been key to its success,” says Rajeev
Thakkar, chief investment o cer at PPFAS Mutual Fund.

Take, for instance, racking. A company pre-IPO prospectus states

that to e ectively utilise resources, the company has higher
racks—the upper ones used to store goods and the lower ones
for display. Sounds intuitive, but few retailers take the racks all
the way to the ceiling like DMart does. The result: More e cient
storage of goods. Couple e cient operations with rapid
expansion and the result is a company whose stock the market
can’t get enough of.

The context is clear: India’s retail landscape is littered with

businesses which either achieved scale at the cost of pro tability
(Walmart in India and the Future Group) or ventures that simply
underestimated the challenge of running a retail business (More,
Spencer, Easyday) and shut shop (Vishal Retail, sold and is now
run by TPG). “Supermarkets, especially in the early days,
struggled to come up with the right approach, a winning
proposition and unit economics that could yield sustainable
pro ts and be rapidly scaled up,” wrote HSBC in a June 2017
note.  

The high mortality rate is a direct consequence of the

peculiarities of the Indian market.

There is the maximum retail price, or MRP, regime. Goods in

South Mumbai, where shop rentals can rival those in Manhattan
or central London, have to be sold at the same price as, say, on
the outskirts of Lucknow or Indore where the rentals would be a
fraction. This places organised retailers at a big disadvantage
compared to the kirana or mom-and-pop stores that run out of
owned premises bought many years ago, with no rentals to pay.
They typically have a far lower cost structure (they often use
child labour or don’t have to pay employment taxes like
provident fund).

Also, the famed ine ciencies in India’s supply chain are often
not what they are made out to be. As Kishore Biyani who set up
rival Future Retail has often said publicly, India’s traditional retail
industry is very e cient, there is hardly any wastage of food, and
the local kirana will deliver whenever you want, in the smallest
possible quantity and o er credit.

This is a tough combination for an organised retailer with its high

corporate overheads to beat.

So how did DMart do it?

Since opening its rst outlet in Powai in 2002, DMart now has
131 stores across seven states
Image: Mexy Xavier

Damani, 61, who typical of his media-shy reputation declined to

be interviewed for this story, decided to try his hand at retailing
in 1995. Ramakant Baheti, the chief nancial o cer of Avenue
Supermarts and a Damani hand for the last two decades, says
his boss entered the business “with a view to create something
other than stocks to leave behind for the next generation”.

Damani, at the time, was a successful investor in consumer

stocks—Gillette and VST Industries are two through which he
made a small fortune. A believer in the power of brands,
Damani, recalls Baheti, read up on global retailers before
entering the business. While he was interested in the grocery
side, he saw that, globally, value retailers like Carrefour and
Walmart were the only ones to have achieved scale.

He earned his spurs over the next decade during which he ran
two franchises for Apna Bazar. He’d spend time in the 7,000
square feet Nerul store and observe which items moved, how
customers behaved and what level of discomfort they would put
up with (unlike other retailers he eschewed air conditioning). But
Damani had less exibility than he would have liked as 60
percent of the assortment was dictated by Apna Bazar.

While those familiar with Damani were surprised at his choice of

profession (retailing was looked down upon in the South
Mumbai social circuit he was a part of), they were also impressed
by his dedication. In 2000, Damani incorporated Avenue
Supermarts and started a three-store operation named DMart
two years later in Powai, and soon after in Kandivali and Malad.

Dheeraj Kampani, now vice president, buying and

merchandising, at DMart, was then a sales supervisor with
Hindustan Unilever and had interacted with Damani on several
occasions. He recalls a man who wore only white shirts and
trousers and sneakers and introduced himself as the purchase
manager. “While he didn’t look like an employee, his mannerisms
were not that of an owner either.” He also remembers Damani
experimenting a lot while buying. The store assortment was his
baby. He would say, “In retail, everything is science. Assortment
is art.” Always on the lookout for a bargain, his line to Kampani
was, “Price mera, quantity tumhara.” (“I state the price while you
decide how much to supply.”)

Damani was actively involved in the business till 2006 and

continued to mentor young merchandise buyers till 2011. Even
today, he regularly talks to the team and visits suppliers in India
and overseas. However, his only representation in the business
is through his daughter, Mumbai-based Manjri Chandak, 32, who
sits on the board as a non-executive director.
 
Noronha, who manages the business, had caught the investor’s
eye and, in late 2003, Damani casually asked Kampani to have
his boss (Noronha) call him. Noronha, who looked after modern
trade accounts at Hindustan Unilever at the time, had by then
moved to Delhi. In just eight years at the FMCG major, he had
already made it to the management cadre—he had started as a
supervisor in the market research department and then joined
the sales team (also as a supervisor).

Damani wooed him over a series of conversations, but Noronha

admits to being con icted. Competition comprised players like
the Future Group and RPG Retail with a larger scale of
operations. But working at a smaller company was also an
advantage, he thought: At the bigger retailers, he would barely
get a meeting with the purchase manager, leave alone the CEO.
At DMart, he would deal directly with Damani. More importantly,
data revealed that DMart’s stores had the fastest throughput.
Noronha’s only doubt was about the scalability of the model.

Nevertheless, Noronha signed on in January 2004 and started

working at the Malad store as head of operations, where the
entire DMart team operated out of “three desks”. And he started
to make a di erence from the get-go.

The rst thing Noronha realised was that price was a

di erentiator in India, particularly for groceries and fast-moving
consumer categories like toiletries and personal care. The whole
operation had to be geared towards o ering an everyday low
price. But since margins in this business are wafer thin, inventory
turns are the key. “The trick lies in driving footfalls through
grocery and then selling higher margin items such as toys,
crockery, garments, home appliances and footwear,” says
Noronha. “It’s
the groceries
that get
shoppers in,
but the general
merchandise
that drives our
pro ts,” adds
Baheti.

 DMart’s
strategy is in
contrast to the
Future Group’s
which relies
more on a
loyalty-driven
membership
strategy where
frequent
shoppers are
o ered deals
not available to
others. (DMart
has no loyalty
programme.) To
get the best
prices for
groceries DMart
follows a simple
strategy. It pays
suppliers faster
than others (on
an average, 8
days as against
60 days by its
 rivals) in
exchange for an
upfront
discount which
is then passed
on to the
customer.
Other savings
are extracted through operational e ciencies. For instance, in
2006, when DMart was just a seven-store operation, it
implemented its rst enterprise resource planning (ERP)
platform. “Over the years, we’ve implemented an auto
replenishment system, which allows us to track in real time how
goods are moving across any store in the network,” says
Narayanan Bhaskaran, chief operating o cer for supply chain
management at DMart. By 2011, DMart set up a distribution
centre. Unlike competition, it hadn’t spread itself thin across
India; instead, it had clustered its stores across Maharashtra and
Gujarat. Investments in an ERP platform and distribution centre
allowed the company to have a far more e cient supply chain
than competition, who did the same only when they achieved
scale.

Squeezing costs was not just restricted to e cient buying and

supply chain e ciencies. At the store level, Noronha and team
took a careful look at every cost parameter. “They’d give buyers
only as much discomfort as they could tolerate,” says a fund
manager who has studied their model. (He declined to be named
citing company policy.) The air conditioning was turned down,
the aisles were not too widely spaced. Store employees were
hired by an agency—“we later hired the better ones,” says
Noronha —to cut costs and deal better with peak demand.
DMart employs only half the number of employees per square
feet as rivals, according to a research note by Ambit Capital.

The company also discounts products according to the

catchment area. Shopping at the Powai store would be 5-7
percent more expensive than at the Chandivali one, according to
the fund manager. The assortment also varies. DMart’s
philosophy is to only sell items that have high turns. As Kampani
explains, “We’d stock di erent soaps and detergents depending
on what the catchment area of that store can a ord.” The result
at ₹29,000 sales per square feet is more than twice that of rivals.

All this results in a superior days sales of inventory—a key metric

by which retailers are measured. DMart’s stands at 25 days,
which compares favourably with Walmart’s 32 days for its global
operations; Future Retail’s is 80 days.

DMart has also chosen to own the real estate on which its stores
stand. In India, all other retailers rent; this allows them to
expand faster and leave a location if the store does not perform
according to expectations.

However, ownership gives DMart the latitude to get space at an

attractive price at a new urban cluster, and allows for greater
exibility in store layout and the percentage mix of various
products. But as it grows, sticking to the ownership model could
slow down expansion. This is why it has also started taking
stores on long leases.

At the same time, while buying property, Baheti says, the

company is always cautious. He estimates that the total
investment in the business (both in property and technology)
has not been more than ₹500 crore to date and says Noronha
and he have a competitive streak when it comes to sourcing the
best locations. “We often joke with each other that the location I
spotted is doing better than the ones you spotted,” says Baheti.

As modern retail drives deeper into India, DMart nds itself well-
positioned to capture a large slice of the pie. The company has
spent a long time perfecting its model—the rst 10 years saw
DMart scale up to 55 stores. It has since ramped up to 131 stores
across seven states. As modern retail in India accounts for just 9
percent of the total retail industry, according to Technopak,
there is immense scope to grow. The company says that any
town with a population of more than 100,000 holds the potential
for a DMart store. It will have to account for regional variations in
the food palette, but is con dent of getting it right.

In time, DMart also plans to work harder on its private labels as

those will provide an additional margin kicker. “Brick and mortar
retail is hardly a winner-takes-all business and there is enough
space for several players,” says Noronha.

One area where DMart could face signi cant competition is

ecommerce.

During the IPO roadshow, while investors were excited with how
DMart had kept costs low, they were concerned about the
potential threat from online retail. An aggressive move towards
groceries by Amazon or BigBasket could have DMart on the
backfoot. RedSeer Consulting estimates that there are 45 million
online grocery transactions across India, which have far less
widespread adoption as compared to, say, books, mobiles or
clothes. Each customer shops about 10 times a year, making the
online grocery shopping population 4.5 million strong. “Even in
areas where there is direct competition, the online grocers
haven’t been able to challenge the o ine guys e ectively as
people want instant ful lment, pricing and a wider range of
products. As of now, online grocers are still struggling to get the
unit economics right,” says Mrigank Gutgutia, ecommerce
analyst at RedSeer Consulting.

However, an increase in smartphone penetration could change

that. Noronha is cognisant of the threat, but has reservations on
how soon and how large a threat it could turn out to be.
Groceries occupy a large volume compared to other online
purchase items, but are priced lower and have lesser margins.
BigBasket and Grofers both lost money in the nancial year
ended March 2016, the last scal for which numbers are
available. Sales at BigBasket jumped three-fold to ₹563 crore
while losses rose four-fold to ₹277 crore.

This makes delivering pro tably a challenge as customers expect

a discount. “The biggest advantage we have is that customers
come to our stores and take the items home themselves. Home
deliveries are the fastest way to the graveyard,” says Noronha.

Hedging its bets, DMart is experimenting with a hybrid model —

DMart Ready. These are small shops (no more than 200 square
feet). Customers who have placed their orders online—they
receive the same discounts as those who buy in-store—come
and collect their items. So far, 40 DMart Ready stores have been
set up. Home deliveries will only be o ered for a fee.

For now, the DMart juggernaut continues to roll. “One has to

realise that companies which succeed over long periods of time
have robust systems and processes across functions. These
ensure that they don’t stumble as they scale up or evolve. DMart
ts that description,” says Rakshit Ranjan, portfolio manager at
Ambit Capital’s Co ee Can PMS.  

In the nancial year ended March 2017, its revenues rose by 38.5
percent annually to ₹11,881 crore while pro ts increased by over
51.8 percent a year to ₹483 crore. The market expects it to
continue to post quick growth. But there is always the question
of whether too much growth has been priced in. At ₹69,000
crore market cap, the stock trades at an astronomical 121 times
compared to the estimated March 2018 earnings. One reason
for this could be the limited supply available—only 10 percent of
the outstanding shares were divested during the March 2017
IPO.
In valuing a company like DMart there are other aspects that
need to be considered—those that can’t be described in
numbers. First, the extensive stock ownership plan that was
rolled out across the company in 2009. In a series of
conversations with Damani, Noronha convinced him about the
bene ts of the plan. Over 90 percent of DMart employees who
joined the company prior to its listing in March 2017 have stock
options. Noronha owns 2.44 percent while Baheti has a 0.57
percent stake. (As an aside, Noronha mentions he is extremely
uncomfortable with the rising valuation as it puts additional
pressure to perform. “The business drives us and not the
valuation,” he says. In fact, Damani, who holds 82.2 percent, has
shot up the annual Forbes India Rich List rankings to No 12 this
year, with a net worth of $9.3 billion, which of course includes
wealth from other sources.)

Second, the management team that DMart has built. Loyalty and
long service are prized as is the ability to work in a team. In any
organisation that grows rapidly, there is always a tendency for
the early team members to feel left out. Noronha has strived to
maintain a balance between the old and the new, saying that
“ tting in” is a key criteria as is competence. There’s a convivial
o ce environment and a superstar culture is discouraged. For
the most part, the o ces are open plan with a few see-through
cabins.

As he looks back at what they’ve created, there’s a tinge of

wistfulness in Norohna’s voice. Recalling his initial year at the
Malad store, Noronha remembers how he and Kampani would
joke that this job allows you to sleep well at night as you get so
tired walking around the store all day.

He also mentions the rst expansion outside of Mumbai into

Ahmedabad where they fell at on their faces. The store size had
to be shrunk before buyers eventually ocked to the outlet.
“That was a good reality check,” says Noronha.
And nally there is the stellar listing that has made Noronha’s
stake worth over ₹1,600 crore and over 400 employees (mainly
store sta ers) worth over a crore each.

But some things never change. Noronha still drives his 10-year-
old Skoda Laura and makes sure he visits stores often enough,
interacting with buyers and sta alike. How the customer and
the marketplace of tomorrow will evolve constantly keep him
busy. “At the end of the day, we are just a product of the
opportunity we got,” he says.