Why is DMart opening bigger and bigger stores?
Friday, November 12, 2021 by Finshots
A couple of days ago, a media report indicated that hypermarket chain DMart closed a deal on a 67,404 sq ft retail space in Central Bengaluru. Why are we talking about it today? Well, it could be signalling a change in strategy for the retail giant. So, let’s dive in.
Hypermarket chain DMart’s strategy is really simple — sell groceries and daily use items like soaps to consumers at bargain prices. Because if there’s one thing that all Indians love, it’s a discount to the MRP! And that gets people to flock to DMart for their grocery fix. Higher footfall in stores translates into higher sales. And that, in turn, helps the company to turn over its inventory quickly. It can then negotiate with its suppliers for better prices and pass on the discount to customers. The “Everyday Low Prices” strategy is its real star. And even though DMart also sells other high-value products like home appliances, crockery and clothing, 50% of its revenues have consistently come from the food and grocery segment.
Now typically, DMart has preferred its nearly 250 stores to be in the range of 30,000 sq ft. A fairly large store size allows DMart to offer a greater variety of products to customers. And coupled with the cheap prices on offer, people might be tempted to pick up stuff that’s not on their “list”. When they spend more, DMart wins. But DMart is now buying bigger retail stores. Its average store size is 67,000 sq ft for new stores compared to a company average of around 34,000 sq ft. In September, it even bought a 94,000 sq ft space in Faridabad. DMart is thinking bigger is better.
We know that the real estate market is depressed. So maybe DMart is using the opportunity to snag some great deals on larger properties? Or perhaps there’s something else that’s playing out as well.
The m-word, margins! You see DMart’s proposition of “Everyday Low Prices” has been under some threat. Its competitors — Reliance Smart and Big Bazaar have been slashing prices to recapture their market share. A recent report from Kotak Institutional Equities makes things more apparent. In October 2020, DMart offered the cheapest price for 21 of 30 products that the brokerage tracked. But by March 2021, only 12 products were cheaper at DMart compared to peers.
And you know what happens when you play this race to the bottom? Well, it’ll eat away at your margins.
So, DMart will need its high-margin business — what it calls merchandise and apparel— to pick up in a big way. Typically, the gross margins from this segment are over 25%, while FMCG margins are a paltry 5% or lower. And if you want to sell more of this high-margin stuff, you’ll need bigger retail space. So, perhaps the company is making the transition in a bid to beef up its apparel and merchandise business
Or could this be about e-commerce — an area in which DMart has significantly lagged. Its online channel DMart Ready contributed less than 1% to the parent company’s overall revenue a couple of years ago. But it’s trying to catch up. And DMart Ready now contributes around 3% to the topline.
Now, of course, you’re thinking, “what does e-commerce have to do with larger stores? Isn’t it all about tech and logistics?” And yes, that’s true. But imagine using these mega-sized stores for a dual-purpose — stock all the products you want but also use it as a fulfilment centre for the online venture. After all, the products have to travel from somewhere and a mega-sized store can be the perfect “warehouse” as the company slowly builds its e-commerce game. In fact, DMart may be modelling itself on a strategy used by Ikea — a company that DMart’s CEO seems to be quite a fan of. The furniture giant has converted some parts of its supersized stores into fulfilment centres to meet its newfound love for e-commerce and DMart could potentially try something similar.
And there you have it, higher-margin products along with a push for e-commerce could be why DMart is now eyeing larger stores. But will this help the company’s stock to scale newer heights? Well, that we will have to wait and see.