D-Mart raised many eyebrows in the country when its stock fell to a 52-week low about three months back. Discussions on D-Mart started chirping around at conferences and debate tables on why and how this brand became so big and if it is on the verge of its downfall. But as we write this article, the stock has already taken a u-turn and has once again become a silent blessing for its investors. But that’s not what we are here to talk about today. While stocks may keep reacting to daily news, let us try to understand why D-Mart is D-Mart!
D-Mart is one of the most disruptive companies in food retail industry of India and the reason behind its disruptive nature is the retail mastermind Radha Kishan Damani(yes, that’s what the D stands for!). Let us understand what went into building D-Mart as you know it today:
The first and foremost proposition that D-Mart aimed at was “Price, Price, Price”. The average price of items that you buy at D-Mart are 6-15% lower than MRP. And that’s the reason that D-Mart demands an extraordinary loyalty from Indian middle-class households – who would go to lengths to travel to these stores and do their monthly shopping to save a few bucks.
If you have visited D-Mart stores, you would notice that the stores aren’t a show of fancy, neither are the items selling in it. Moreover, the location of the stores isn’t in some fancy mall or even a fancy market – but an off-beat market where you might not see any other supermarket. Let us try to breakdown reasons behind these strange strategies.
Let’s talk about the price part first: If D-Mart could offer such hefty discounts, why couldn’t a normal retailer?
The answer is Deep Discounting. This is a strategy that D-Mart has been following since day one.
Let us take an example of a commodity, say, Gowardhan Ghee which sells for Rs750/kg. Assuming 20% profit margin for retailer(and purchase price of retailer = Rs600), he earns Rs 150 per unit sold. If he sells 500 units of Gowardgan Ghee, he earns Rs 75,000.
Now, if the same retailer sells each unit for Rs690 (15% profit), he earns Rs90 per unit but because of lower price, ends up selling 750 units instead of 500 units and the total profit turns out to be Rs 67,500.
This might look like lesser profit but there is a hidden benefit that a number of retailers failed to identify back then. First and foremost, it led to more volume in sales and hence a larger footfall – more people coming to buy ghee – but do they buy just ghee when they come to D-Mart? No, there is another laundry list that they come with when visiting D-Mart along with the Ghee on sale that pulled them to the store. This is what you call a product assortment strategy.
Secondly, this strategy enabled D-Mart to have their inventory moving at a flash speed – which means greater number of money rotations for the store and fresher products for the consumer. Most importantly, D-Mart gets a better bargaining power with their sellers because hey, they are selling more in a shorter span of time! For example, if others buy 10,000 units of Gowardhan ghee at Rs600 to resell with Rs150/unit profit, D-Mart could buy 20,000 units and then ask for an extra 10% discount from the brand. Numbers would look something like these:
So, even though D-Mart is selling at a lower price than the market, its profits aren’t hampered. When D-mart started deploying this powerful trick, they quickly started crushing the common retailers and became dominant player in the market.
Now, while this explains how D-Mart tackles with small retailers/wholesalers, how do you think it fights with giants like Reliance Smart stores? This could be summed up into a strategy of being Careful – yes you read that right!
Mr Damani had been extremely careful in expansion of D-Mart stores. In spite of being in the market for two decades, they have only 327 stores while the competitors like Reliance retail has more than 15000 stores and even More Retail has more than 900 stores across the country. Reason of this slow expansion is that D-Mart takes time to do their due diligence – understanding customers in the area and building relationships with sellers. This is the reason that until 2020, they had not closed even a single store while competitors were on a see-saw when it came to opening and closing stores.
Moreover, D-Mart owns all its stores which means no rental expenses, unlike the competitors. While you may think that buying and constructing a store is way costlier than renting one, numbers say a different story. Look at the chart below pertaining to 2017 numbers showing % of revenues spent on rental costs:
This also explains why you do not see D-Mart stores in fancy malls, but in suburbs of tier 1 and tier 2 cities where real estate is relatively cheaper. This cost cutting results into insane level of profits. Also, this is the reason that profit per sqft of DM is more than four times that of its competitors.
India’s organized retail market is still at a nascent stage and estimated by the government’s export promotion agency to be growing between 20% to 25% annually. D-Mart has been the proof of how an insane combination of location, ownership and deep discounting can drive you to mammoth profits. No wonder, Motilal Oswal is expecting revenue of D-Mart to grow at a CAGR of 27% during FY 23-25. With rising inflation and people getting attracted to greater deals, D-Mart doesn’t seem to be dying any time soon - rather, D-Mart is on a galloping horse ready to take on the retail industry of India.
If you think our blog helped you a little get over the anxiety of the news provoked stock fluctuations of D-Mart , then don’t forget to subscribe and share with at least one friend.
By: Isha Garg