D-Mart – Revolutionizing Organised Retail in India

17 February 2022 in Thane (west), Mumbai, the financial capital of India, Mr. Radhakishan
Damani, Owner & Promoter of DMart, was heading for a meeting with his senior
management team. Damani would be addressing the meet and had planned to talk about the
growth opportunities for the firm. The company has several growth options on the table. It
can try to get more business from existing customers by offering new product assortments in
terms of most popular or best-selling Stock Keeping Unit (SKU). It can also expand
geographically by opening new stores within India and augment growth by entering states
with higher retail spending. Damani was wondering whether the company’s business model
is robust enough to keep scaling and expanding while keeping its competitive advantage.

D-Mart, founded by Mr. Radhakishan Damani in 2002, has emerged as one of the most
successful and innovative retail chains in India. The company's business model, focused on
providing value to customers through low prices, efficient operations, and a wide product
range, has led to remarkable success and market leadership. D-Mart operates in the retail
sector, primarily in the grocery and hypermarket segments. It differentiates itself by adhering
to a stringent cost-control approach, maintaining low operating costs, and offering products at
competitive prices.

Indian Retail Sector

Globally, India is the fifth-largest global destination in the retail space after US, China and
Japan & Australia. India is likely to become the third largest consumer economy by 2025 as
per the report by Boston Consulting Group. Indian Retail sector has emerged as one of the
most dynamic and fast-growing sectors due to the entry of several new players in the recent
times along with rising income levels, growing aspirations, favorable demographics and easy
credit availability.

Organized retail is expected to grow at 25% YoY by 2026 & Valuation of Indian Retail
sector is expected to reach $1.2 Trillion in FY 2022-23. A report by FICCI-Deloitte says that
retail sector is projected to grow to around $1.75 Trillion by 2026. The Indian organized
retail market is still in its nascent stage. Organised retail (9%) & online retail (4%)
constitute about 13% of the total retail sector, and the unorganized retail market represents
the remaining 87%. Prominent chains in organized retail space are Reliance Retail,
Spencer’s, V Mart and DMart (Corporate name is Avenue Supermarkets). They constitute
about 9% of the total retail market in India. Food and grocery accounts for the largest share of
organized retail revenue in India, yet constitutes only 3% of the retail food market. The
organized retail market in India is growing at a CAGR of 20-25 % per year, which is a strong
indicator of its future growth potential in the years to come.

About DMart
The journey began when Mr. Damani decided to test the waters by taking up a 5,000 sq. ft.
“Apna Bazar” franchisee in Nerul in 1999. Sam Walton and the Walmart superstores inspired
Damani. He visited USA in 2001, to learn about the operations of Walmart & learn from
them. Upon returning to India, Mr. Damani established Avenue Supermarts Co. in 2002. This
company stated opening stores under the brand “DMart”. DMart started its journey from two
stores in the state of Maharashtra in 2002 and has now reached around 330 stores across 14
states in India. DMart’s product portfolio comprises of Foods (51% share), Non-Foods
FMCG (21% share) and General Merchandise & Apparel (28% share, includes apparel,
plastic goods, home furnishing, toys, etc.) .The presence is skewed toward West India with
states of Maharashtra and Gujarat accounting for approximately 77% of DMart sales. It
operates largely on a land ownership model, which includes buying or entering into long-term
leases (30 years+) versus a rental model. DMart was a privately held company until 2016. In
March 2017, the company raised 18.7 Billion via an IPO. DMart is the most profitable
grocery retailer in India, offering low prices to customers through its stores. It relentlessly
focusses on providing the lowest market prices to its customers. D-Mart's core philosophy
revolves around delivering maximum value to customers. The company recognizes the price
sensitivity of Indian consumers and ensures that prices remain affordable. The "Everyday
Low Cost, Everyday Low Price" strategy resonates with customers, who trust D-Mart for
consistent low prices. The company maintains financial discipline and avoids overleveraging,
ensuring long-term sustainability.

Due to high volume procurement by DMart, manufacturers extend a volume discount, which
further reduces the procurement cost. This supports the low-cost business model and makes it
stronger. In addition, DMart also charges slotting fee from the manufacturer, which pits
different brands against each other to claim the best placement slot in the store. This further
adds to the revenues of DMart. The company stocks only the fastest selling SKUs of a given
product, to ensure that inventory churn is fast, and the company is not saddled with stock of
low-moving SKUs. This accelerates inventory churning, resulting in a better cash conversion
cycle. D-Mart has invested in developing its private label brands, which offer products at
even lower prices than national brands. These private labels have gained consumer trust for
quality and affordability.

DMart operates on a low-interior-cost concept. The store interiors are sparsely decorated and
require low maintenance. Its uses store space efficiently, putting more products in less space,
thereby creating space for more merchandise. Number of billing counters and staff are
optimized for every store. This ensures a small staff is highly productive with optimal
number of machines, thereby reducing employee cost. These techniques have allowed DMart
to control its operating expenses per store. D-Mart is known for its employee-friendly
policies, providing fair wages and opportunities for growth. Happy and motivated employees
contribute to better customer service and operational efficiency. As of now, DMart had a total
of about 11,000 permanent employees and 60,000 employees hired on contractual basis.
India is a diverse country with various region specific goods. The company accepts this
reality and stocks its stores with area-specific products along with national brands. DMart
pools the popular local brands of a particular region in its stores, making it more convenient
for the buyers to avoid going to the multiple local Kirana shops. This helps the company to
reduce competition from local Kirana stores, allowing it to gain market share.

D-Mart has pursued a steady and cautious expansion strategy. Instead of rapid expansion, the
company has focused on organic growth, maintaining financial discipline and ensuring that
each new store is profitable. However now DMart has stated that it is shifting its growth
strategy to aggressive store expansion. It follows a principle of opening 75% of its new stores
in existing markets. Moving from a historical growth rate of 10 stores-per-year, D-Mart aims
to reach a 28-30 stores-per-year velocity. The company is also open to changing its own-and-
operate model to lease-and-operate model if it would permit further growth in store count.
DMart has launched 'Avenue E-Commerce Ltd.,' its online shopping portal, to keep up with
the competition and the industry. However, competing in this space has its own unique
challenges and competitors. The reduction of corporate tax rates in India in 2019, with
average tax rate expected to fall further in coming years should also help its valuation.
Damani wonders whether DMart will be able to keep up with the changing market scenario
and continue to exhibit a high growth rate as it has in the past.

Q.1 How is the landscape changing for the organized retailing industry of India? What
corporate strategies would you recommend to D-Mart for this changing landscape?
Why? (15 Marks)
Q.2 What competitive strategy is currently being pursued by D-Mart? How is it
enabling itself to follow this strategy? Would you recommend any change in their
current competitive strategy? If yes why?
(15 Marks)
Q.3 Suggest how will your recommended strategies (refer Q.1 & 2 above) be
successfully executed by the company?
(10 Marks)