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

Fea re

MAGAZINE | AUG 06, 2011


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.


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
business.outlookindia.com/printarticle.aspx?277789 1/5

Reliance Retail. The company s got the basics of retailing right" . it is a concept that the big boys still wistfully sigh at.715 crore during FY 10. Future Group. Big Bazaar has more than 200 stores across the country.com/printarticle.” he said business.000 sq ft. has accumulated debts to the tune of Rs 4. consolidated sales for all retail ventures of the Reliance Group rose to Rs 4. Andhra Pradesh and Karnataka. D-Mart—800 SKUs. the Rs 1. in the long run. So it is assured of a clientele that walks in because it wants to buy and not just browse. it sells everything an average Indian household requires. which started out in 2007. will be much less than paying rentals. it made no profits.700 crore this fiscal and is yet to break-even . D-Mart has quietly snuck in and settled into a niche. In FY10. identify and make available” new product categories for customers. the average size of a D-Mart —8.500 crore. has been profitable since FY07. which the store passes on to the customer "They have the right assortment of products and are well priced.000 D-Mart outlets in the next 12 months." In the stock market. 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. "D-Mart s strategy of buying properties at prime locations is a double-edged sword. It started operations in 2006. But Damani is tightlipped about the specifics. “I m not ready to talk about my (retail) strategy. from rubber bands and hammers to unrefined jaggery and prayer beads. Gujarat. has helped the company achieve quick profitability. in its nuances.352 crore.100 crore (65% growth). The smaller size of the stores also forces D-Mart to only stock products that sell fast. Thirdly. Secondly.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. 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. the parent company of Big Bazaar. His retail moves mirror this strategy—he believes in continuous endeavours to “investigate. yet it is one that. The strategy is quite simple. the company buys these stores. which reduces its write-offs on clogged inventory." 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. hopes to touch a revenue of Rs 1.352 crore. The retail landscape is constantly reverberating with sound bytes from Big Bazaar. owned by stock market icon Radhakishan Damani. D-Mart sets up stores in dense residential complexes. The average size of a Big Bazaar store is around 50. is a profitable venture—unlike the bleeding giants in the retail sector. The interest on loan taken for buying property is never more than 12% to 13%. Hypercity and other giants of retail.outlookindia. . 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. Thanks to these four simple strategies.aspx?277789 2/5 . this small chain. its net profit grew more than four-fold over the previous year to Rs 21 crore. While D-Mart s debt in FY10-end stood at just Rs 148 crore. 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. on revenues of Rs 1. which.450 crore Aditya Birla Retail. It does not rent them out.000 to 4.3/23/12 business. which set up its first store in Mumbai in 2002.000 SKUs (stock-keeping units) of merchandise. Damani is known for constantly investigating and identifying new buy and sell targets. D-Mart has just 46 across Maharashtra.000 sq ft.000-10. Big Bazaar stocks 3. Its customers are value-conscious middle-class families who prefer its modestly-sized outlets to swanky malls. Unique Strategy .outlookindia. Nevertheless. Damani s D-Mart. This means that there will not be 1. which constitute about 30% of the operating expenses of a retailer and keep escalating every few years. While. Similarly.

for a 50. The retailer spends close to Rs 50-Rs 60 per sq ft. is the way to go.” says a source.aspx?277789 3/5 . D-Mart. This measured expansion policy helped D-Mart fight the economic slowdown in 2008-2009 successfully. the retailer would be spending close to Rs 30 lakh a month on rent. if a retailer is renewing a rental lease after nine years. Most Big Bazaar stores are in malls. it has chosen to keep store size small—almost a sixth of Biyani s Big Bazaar.000 stores in 86 cities beginning 2007. Rapid expansion also leads to rapid losses. it did not need to borrow heavily. Scale Versus Profits Damani has given the thumbs down to scalability for the sake of profitability. but because they have expanded too aggressively. Damani s conservative strategy helps him build assets on the way and remain in the black. While leads to a strain on cash-flows in the short run. had to shut down and re-size around 400 stores in 2008 as they were bleeding. owning real estate in prime locations.outlookindia. so the balance sheet can take the impact of the interest cost the company accrues to buy the stores. Reliance Retail. The promoter s equity is high and debt is low. 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. The Small Wonder Tho gh mall in compa i on.3/23/12 business. He does not believe in renting commercial buildings or malls. Since the company did not go on an expansion blitzkrieg. Protiviti Consulting. D-Mart is the most profitable retail company in India.000 stores since 2006. Managing Director.” remarks a Delhi-based property consultant. the owner can easily arm-twist him into paying a ludicrously high rent. While retail rentals in Mumbai have remained almost stable in the last two years. Therefore. D-Mart was the only retailer that didn t close a single store. 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. Location is an important component of retail. but shields the company from future uncertainties. “D-Mart is targeting not more than 10 to 12 stores a year in the foreseeable future.000 sq ft store. “D-Mart s strategy of buying properties at prime locations is a double-edged sword. Damani can hope to sit back and laugh when rentals move northwards. Moreover.outlookindia. it presents a significant upside as the areas develop and realty prices increase. makes a huge saving on rentals. In contrast. And rightly so. “Companies such as Future are in the red not so much for their real estate strategy. business.8 lakh per month. the outgo would be just about Rs 4. with good pedestrian traffic. familiar with the company s strategy.” says Mritunjay Kapur. An email sent to D-Mart CEO Neville Noronha remained unanswered. Almost 30% of a retailer s costs go towards rentals. Its retail model has caught the attention of private equity players. Therefore. D-Ma ha b ig n mb e o peak fo i p ofi and a igh g ip o e deb . by owning its stores.com/printarticle. after opening 1. 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. even if D-Mart was to take stores on rent. So. Damani s retail model is quite different from the rest. Damani s strategy of owning real estate leads to a capital outflow in the beginning. For him. The first D-Mart store opened in 2002. and in the last nine years the retailer has taken the count to just 46 stores.com Will The Real Sam Walton Stand Up? . In contrast.

unlike other retailers. 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.” 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. For now. in terms of the timing of buying property. Therefore. D-Mart. for a format like D-Mart. Typically. the company that set the multi-brand retail segment on a roll in the country. the economics may not work out. people living within a 2 km radius of the store. So vendors ask for higher prices to compensate for the interest burden it puts on them. And that—the ever increasing real estate prices—remains a challenge as Damani looks to expand further. compared to 90 days for Pantaloon Retail. says D-Mart has been bang on. According to Harminder Sahni. But buying property in Malad now (it is in excess of Rs 15.” he adds. Parklane Advisors.352 crore without owning properties and is still reeling under losses. But this is not the case with D-Mart. which the retailer passes on to consumers. And he has to resort to short-term borrowings to fill the gap in cash flow.000 per sq. Here is a company that not only makes profits but also owns its properties. Sequoia Capital. Its different retail model has also caught the attention of private equity players. New Silk Route and HDFC Private Equity. was bought around eight years ago. breads. “They have bought out properties at the right time at good. the most crucial of the products—and give up the 20% for which hypermarkets exist anyway. the truth is that D-Mart is the most profitable retail company in India. D-Mart believes in paying cash outright. Other retailers have a credit cycle ranging from 15 to 60 days.” The other question one needs to ask is whether a store. The biggies seem to be struggling with these— they seem to be stocking everything and yet missing out on many things. the longer the vendor s working capital cycle. the industry believes that it is prudent to have limited offerings and offer better prices instead.3/23/12 business. They have the right assortment of products and are also well priced.000 per sq ft) to set up a store could be suicidal. “D-Mart may be much smaller in size and may have lesser SKUs. Founder. competitive pricing. which believes in the ownership model. it s the location that matters with respect to the primary catchment.” says a vendor who supplies D-Mart. Managing Director. seafood and so on. Most malls work on a rental basis.” says Pinaki Ranjan Mishra.” explains Kumar. Not at all. the longer the credit period. the number for DMart is only 6%. their stocks move much faster than any other retail store. So if Damani has to put up another store in Malad now.aspx?277789 4/5 .” The D-Mart property in Malad. but it may not always work to their benefit.ft.outlookindia. Damani has chosen to go in another direction. about 21 days. Norwest Venture Partners. One of the reasons most FMCG companies are more than eager to supply to DMart is because of its high turnaround. E&Y. The Future Group. The company has got the basics of retailing right. While inventory comprises 25% of sales for Pantaloon Retail. Wazir Advisors. business. whose discounts are limited and never guaranteed.outlookindia. The result: vendors give big discounts to D-Mart (anywhere between 5% to 12%). for instance. Damani seems to be following the Pareto Principle here —focus on 80%. Partner & National Leader (Retail and Consumer Practice). they repay us within two days. ie. The discounts range from 2% to 10%. when the rates were in the region of Rs 2. Malad was an upcoming residential area and didn t have any modern retail stores to boast off. would have to compromise on footfalls and therefore conversions. Limited SKUs & Higher Discounts The biggest incentive for consumers to shop in D-Mart is the guaranteed discounts. not housed in a mall. has accumulated debt of Rs 4. and for us it s almost like selling for cash. of real estate consulting company. on an average. would not even be welcomed by mall owners. That s a guarantee from them. are known to have expressed interest in the company. 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. “The timing was perfect.com Will The Real Sam Walton Stand Up? To Mall Or Not ? While all large retailers are counting footfalls. “We are happy to give higher discounts to D-Mart because they not only pay us immediately. “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.com/printarticle. but they are always well-stocked. “D-Mart gets better discounts from us because unlike other retailers. This shows that D-Mart has very little inventory. He prefers to set up smaller stores within a neighbourhood. Future hazards? Akshaya Kumar.

Click here to see the article in its standard web format business. it has to improve store sales and squeeze out efficiencies to be able to repay its debt. with a profitable venture in hand.aspx?277789 5/5 . 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.outlookindia. But the fact is.3/23/12 business.com Will The Real Sam Walton Stand Up? Today. he can. Damani is coming.outlookindia. Biyani better be worried.com/printarticle. Borrowing more to expand is not an option. the financial situation of the Future Group puts it in an uncomfortable position—it can t expand anymore. In contrast.

Sign up to vote on this title
UsefulNot useful