D-Mart had given a new lease of life to the challenging sector as it debuted on the markets in 2002, a time when a majority of Indian retailers were struggling to build profitable businesses. Since then DMart left its footprints in 214 locations with annual revenue of Rs 20,500 crore.
Why is DMart so successful? How does DMart give so much discount? What is the business model of DMart?
A brief introduction to DMart
DMart is a hypermarket chain owned by “Avenue Supermarkets” founded by the value investor “Radhakisan Damani” in 2002 in Mumbai.
As of 31 March 2019, DMart had a total of 7,713 permanent employees and 33,597 employees hired on a contractual basis.
The company’s shares were at Rs 299 apiece at the IPO and surged as much as 106% after listing at Rs 604.4 on the Bombay Stock Exchange on opening day, making it not only the first retailer to list in a decade, but also perhaps the best IPO listing in recent Indian corporate history.
After the close of the stock on 3 August 2020 at Rs 2077, its market value rose to Rs 1,35,000 crore.
DMart’s Business Model
A successful business model is the crucial element of any business to flourish, grow, and beat its competition.
DMart is known for its thrifty cost structure. The characteristics that made DMart the Walmart of India are:
1.Low operational costs and reduced expences
When you visit a DMart store you will not find fancy-looking interiors and adorned shelves. Instead, all products are stuffed for efficient space utilization by putting more products in less space thereby creating space for more products. Fewer billing counters reduce the requirement of more workforce and systems thereby reducing employee cost.
DMart operates on a low-interior-cost concept where it has tried to reduce the operational costs for the company.
Much of the company’s focus stems from Damani’s decision to follow a store-ownership model which allows it to be a low or no debt company making it stronger financially. Further, no rental cost helps in high positive cash flows, which are helpful in opening more stores. Of all the existing stores to date, almost 80% are self-owned.
DMart follows three formats to set up new stores:
- Greenfield stores, where the company purchases land, constructs the store building and fits it out according to its requirements
- Buyout stores, where it purchases the land with ready building and fits them out as per its requirements, and
- Occupying properties on leasehold basis or rental basis
The company has spent over Rs 23,000 crore on acquiring land and buildings but either owns most of its stores or has them on a 30-year long-term lease. A recent ‘Yes Securities’ analyst note points out that DMart’s rental costs are only 0.2% of total sales compared to 8% for Biyani’s Future Retail.
3.Low purchase price for products
In the FMGC sector, retailers pay off the credit to the vendor within the credit period of usually 3 weeks. Whereas DMart pays off the credit within a week. So the vendors give massive discounts to the DMart thereby DMart gives a huge discount to the customers.
Low price leads to high footfall in the store leading to high sales volume, thereby attracting more and more manufacturers to keep their products in the store. Further, due to high volume sales, manufacturers also extend a volume discount by reducing the purchasing price.
DMart charges a ‘Slotting Fee’. It is a payment made by the manufacturer of goods to the store to keep its products on the shelf for sale. Also called an entry fee for the products, which are held in the supermarket.
The store attracts high volumes of customers, making it the best place for the manufacturers to keep their products. This attracts more and more manufacturers willing to put their products in the store.
This slotting fee indirectly reduces the product’s purchasing price for the DMart, thereby allowing it to offer the products at discounted prices usually less than the MRP.
The chain operates on a B2C (Business to Consumer) model, where goods are directly sold from the manufacturer to the end-consumer. With its direct bulk purchase, DMart has eliminated the middleman (distributor and wholesaler) and the commission is passed as discounts to consumers.
This further helps the company to sell goods at a lower price.
Well, if you think all products are cheaper in Dmart then you are wrong. DMart uses FMCG products as anchors to sell its high margin products like Toys, Fruits & Vegetables, Grocery & Staples, Crockery & Plastic Containers. Moreover, Dmart has its own branded products in Grocery, Home & Personal Care section which has high margins.
DMart’s targeted customers are middle-class groups and lower-middle-class groups who are looking for low-cost goods and discounted goods of good quality. Thus DMart attracts a more extensive customer base than other retailers.
India being a diverse country has various regional specific goods. DMart grabbed this opportunity by stocking its stores with area-specific products.
DMart pools the popular local brands of a place, making it more convenient for the buyers to avoid going to local Kirana stores. This helped DMart to cut the competition from general Kirana stores gaining more market share
8.Unique operating strategy
While competitors head to rapidly-growing malls because that’s where consumer spending is the highest, D-Mart hasn’t and doesn’t ever plan on opening a store in a mall. D-Mart sticks to what it knows best. It uses one of the two formats of stores whose size depends on location and shopper density.
The company is also extremely reluctant to expand geographically. Until 2014, it had stores only in four Indian states. Over the last few years, it has expanded into five more states but is still conspicuously absent in the NCR region and other high consumer spending states.
Analysts point out that it follows a principle of opening 75% of its new stores in existing states or markets and plans on staying true to this in the coming years.
This strategy pays off for the company. In its 17 years of operations, it has never closed, moved, or shut down a store.
Also, DMart maintains low marketing costs. The main marketing strategy of DMart is “WORD OF MOUTH”.
When DMart brings any product into the store which generally has a limited shelf life, they are stocked in huge consignments.
But if these products are unsold and are reaching their expiry date or the company has introduced a new variant of the same product (like new improved features) then DMart repackages/clubs them with complementary goods and restocks them in the store with discounted prices and offers such as buy 1 get 1 free.
DMart’s business model is a never-ending loop
DMart starts with low-cost products that consumers need on a daily basis and that they can sell for slightly below MRP. This allows them to rack up a great inventory turnover ratio (a measure of the sale of an inventory). Then they use that quick inventory turnover to negotiate better prices with vendors which in turn allows them to support the low prices.
While other companies have expanded quickly into multiple segments with differentiated retail chains, DMart’s sales mix is largely limited to food and groceries. Categories like high-end electronics, jewelry, and watches – which companies like Reliance have forayed into and which make up as much as 25% of Indian consumer spending – is something the company stays far away from.
This, along with the above-mentioned characteristics and Damani’s unbeatable vision has made DMart the country’s most successful hypermarket chain.
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