Power Pack

Retail

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• Corporates entry into Organized Retail :3

• Reason for Financial Losses of Retailers : 10

• FDI in Retail : 14

• Expected Future Growth : 17

• Company Analysis Framework : 19

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 Corporates Entry into Retail

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 Size of Retail industry was Rs. 59 tn in 2018-19.

RETAIL INDUSTRY MARKET SIZE

Source: Crisil Research

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Why many corporates entered the Retail sector?

• Market Size : Rs. 20 tn (in 2005-06) Rs. 59 tn (in 2018-19)

• Long-term Growth Potential : High

• Demand Supply Equation : Demand > Supply

• Profitability : Decent

•Opportunity in the Food and Grocery : High

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Why many corporates entered the Retail sector?

• Stage in the industry life cycle Introduction Stage

• Intensity of Competition Low

• International Examples Positive

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 Exercise

A trader buy an item for Rs. 100 in the morning and sell it for Rs.

101 in the evening. He repeat this process every day of the year.

Calculate the following:

• Annual Sales

•Net profit and profit margins

•Return on Capital Employed

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8
 Exercise

Annual Sales = Rs. 101 * 365 = Rs. 36865

Annual Profit = Rs. 1 * 365 = Rs. 365

Profit Margin = Profit / Sales = (365/36865) *100% = 1%

Return of Capital Employed (ROCE) = Profit / Capital Employed

= ( 365/100)* 100% = 365%

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 Why many Retail players were
making huge losses till recently?

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• Why many players in the Retail sector are doing badly?

•Faster expansion
Debt
Huge operational losses

•High Rental costs

•Terms of agreement between the mall owners and the retailers

•Not able to achieve the break even sales at store level (Low Footfalls,
Low Conversions, Low Ticket size)
Local Saturation
Wrong merchandise mix
Competition from kirana stores
Wrong location
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 US / Europe India

Retailer Retailer

Pay part Fully Fixed

Fixed and Rentals
part Variable
Rentals

Mall Developer Mall Developer

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• Why many players in the Retail sector are doing badly?

•Operational inefficiencies
• High Inventory
• Expiries
• Stock-outs
• Shrinkages
•Lack of bargaining power with suppliers
•Manpower issues
•Regulatory Challenges
•No industry Status
•CST
•APMC act
•ULCRA
•No. of licences to open a store (28 licences to open a store
whereas one need only 13 licences to buy a gun)
•Venturing
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into Retail without Proper Business Model
 FDI in Retail

14
FDI Norms

FDI Limit
Before 2012 After 2012
Single Brand Retail 51% 100%
Cash and Carry 100% 100%

Retail Supply chain 100% 100%

Multi-brand Retail 0% 51%

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 Why no FDI in multi-brand retail so far?

• Political uncertanities

•Requirement of State-level approvals

•50% investment in back-end infrastructure

•30% procurement through SMEs

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 Expected Future Growth

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 TRENDS OVER THE NEXT 3-5 YEARS

• Retail players in the last few years have focussed on operational

improvements, same store sales to reduce the losses. This trend is
expected to continue

• D-mart, Reliance Retail, Future Group, V-Mart, Trent have already

become profitable.

• Some more players like Spencers may achieve break-even in the next
2-3 years.

•FDI may come if the political uncertainty reduces and if the

FDI norms are relaxed

•Organized Retail is expected to grow at 12-15% CAGR in the next 3 to

5 years.

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 Avenue Super-
Markets

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 COMPANY INTRODUCTION

•Avenues Supermarts Ltd (ASL) which runs D’mart brand of stores opened it’s first
store in 2002.
•Most profitable mass retalier in India. In 2018-19, it has achieved an EBIDTA
margin of 8.2%, and ROCE of ~27% in a highly competitive market.
• D’Mart has inventory turns of 13x which is even higher than Walmart inventory
turnover of 10.5x.
• The company got listed in March 2017. On the listing day, the shares closed at Rs.
640.75 compared to the issue price of Rs. 299 per share.
•The listing made Radhakishan Damani, Founder Chairman of the company richer
than Anil Ambani, Rahul Bajaj
•Market Capitalization increased from Rs. 48,500 crore as on April 11,2017 to Rs.
80,993 crores as on May 28, 2019
• World’s most expensive retail stock in terms of P/E ratio at 86.7 as on May 28,
2019.
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 The company has been growing at a spectacular rate while
maintaining its profitability

COMPANY FINANCIALS

Source: Company Data, Edelweiss Research

21
 D-Mart has much better operational metrics compared to the
domestic and global competitors.

COMPARISON WITH KEY COMPETITORS

Source: Company Data, Edelweiss Research

22
 D-Mart operates only one type of store format unlike other Indian
Retailers.

FOCUS ON SINGLE FORMAT AND STANDARDIZED STORE

• Most retailers in India have multiple formats –

•Future Retail has presence in Hypermart, Convenience stores, Home
and Electronics, apparel stores etc
•Trent has presence in Departmental stores, Hypermarts, Convenience
Stores etc
•Reliance Fresh is also present in multiple formats
• Unlike other retailers D’Mart has focused on only one store format –
Hypermarket
• The store sizes are also highly standardized which vary between 30,000 Sft to
35,000 Sft.

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 Single format standardized stores helped D-mart in operational
efficiency and cut costs.

BENEFITS OF SINGLE FORMAT AND STANDARDIZED STORE

• Capex costs for setting up stores of similar type are lower. It becomes easier for

the project teams to plan and execute projects

•Management time and energy is focused rather than looking after too many

formats, which results in better execution

• Standardization help in reducing costs.

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 D-mart’s model help them to save around 8% to 9% in rental costs .

OWN PROPERTIES AND NOT RENT PROPERTIES

•D’mart has followed a conscious strategy of owning the property and
constructing the stores.
• Even if they go for leasing, it will be for a long lease of 30 to 60 years.
• This help them to customize the stores as per their requirement and save on
rental costs.
• Although D’mart spend huge capex on land and buildings, it has been more
than compensated as its rental cost is less than 1% of sales as against the
industry average of 8% to 10%.

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 The company avoid shopping malls as it has several
disadvantages.

AVOID SHOPPING MALLS

• Though hypermarts are anchor tenants in shopping malls and get
concessional rentals, D-mart generally do not open stores in malls because:
• Many malls in India are not planned well.
•The lease period in shopping malls is ~10 years, if the lease is not renewed,
the retailer will have to exit. This can be a big business disrupter.
•Steady increase in lease rent at 5% CAGR and bundled increase when the
lease is renewed.
•Steadily increasing mall maintenance and housekeeping charges.
• Standalone Hypermarts attract more serious shoppers which increases
conversion ratio.

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 The company follows the strategy of opening the stores in the
same clusters.

CLUSTER STRATEGY
•D’Mart has followed the strategy adopted by Walmart in USA by opening
stores in same cluster.
•Interestingly none of the other existing retailers in have followed this
strategy in India.
• Though D-mart has 176 stores- Maharashtra, Gujarat, Telangana &AP
constitutes 136 stores (79% of the total number of )Stores and around 83-85%
of the revenues.
•Also the company has a policy, where greater than 75% of the stores will be
opened in existing clusters where they already have their presence.
• This helps in achieving high distribution efficiencies.

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 The company follows the strategy of opening 75% the new stores
in the same clusters.

REGIONWISE STORES SINCE 2014

Source: Company, Edelweiss Research

 The company expands by entering new geographies which are
nearby to its existing clusters.

D-MART’S CLUSTER APPROACH

Source: Company, Edelweiss Research

 D-Mart did not go for mindless expansion which many players
undertook between 2005 to 2012.

CAUTIOUS AND STEADY EXPANSION

• The company began FY13 FY FY 15 FY 16 FY 17 FY 18 FY 19

operation in 2002. 14
Store in 55 62 75 89 110 131 155
• For the first 11 years, the year
the company opened on beginni
ng
an average only 5 to 6 New 7 13 14 21 21 24 21
new stores a year and Stores
Opened
ended 2013 with a total
Stores in 62 75 89 110 131 155 176
of 62 stores. the end
• Even after 2013, the of the
year
company’s new store
additions have been Source: Company Data, PL Research

averaging 17 per year.

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 D-MART’s primary strategy is Same Store Growth through
increasing Sales per SFT.

WHAT MAKES D-MART REVENUES GROW FAST AND ALSO PROFITABLE?

Source: Company, Edelweiss Research

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 Changing Sales mix also helped the company to improve the
margins.

IMPROVED FOCUS ON HIGH MARGIN CATEGORIES

D-MART’S PRODUCT MIX

Source: Company,
Edelweiss Research

• Food and FMCG are low margin categories for Retailers.

• Though D-mart’s primary focus is on Food and FMCG, they have improved
the sales contribution from General Merchandise and Apparels which helped
them to improve the margins.
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 Number of bills generated by the company have almost trebled
between FY 2015 and FY 2019.

BILL CUTS TRENDS

Source: Company, Edelweiss Research

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 D-Mart’s inventory management is the best in the industry.

HIGH INVENTORY TURNOVER

• D’mart has maintained ~14x
inventory turns which is the highest
in the industry.
• D’mart has focused on a few
territories which have enabled it to
use its local market knowledge for
assortment selection to push sales
and minimize inventory in line with
the tastes and needs of local
population.

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 Unlike other retailers, D-mart has so far been going slow on
Private labels compared to other retailers

GOING SLOW ON PRIVATE LABELS

• Most global and Indian retailers launch their own private labels to improve the
margins. For example, Walmart currently derives 39% of its sales from private
labels.
• D’mart has not tried to aggressively launch own brands in branded FMCG
segments in personal care, household products and food as it believes in
 providing high quality branded stuff to the consumers
 large brands have economies of scale which is hard to achieve so attaining
their cost structure is not possible and
 not diverting resources and management attention in non focus areas.

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 The company follows the EDLP and EDLC strategy.

EDLP AND EDLC

•D’mart has created a strong niche in the hypermarket segment with focus on

EDLC and EDLP (Every Day low cost and Every Day low pricing).

•Rather than focusing on periodic discounts it has a motto of “everyday

discounts, everyday savings”.

• To achieve EDLC, D’mart has efficient sourcing and inventory management

system to ensuring high fill rates and faster stock movement

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