In­dian re­tailer D-Mart suc­ceeds where Wal­mart and other for­eign ri­vals have failed

Cheap gro­cery prices fuel sales of other, higher-mar­gin goods “We’ve been do­ing just one thing. No dis­trac­tions”

Bloomberg Businessweek (Asia) - - CONTENTS -

In­dia has long been the place big re­tail­ers go to lose money. Wal­mart Stores landed in 2007 with dreams of a su­per­mar­ket em­pire but, be­cause of mea­sures de­signed to pro­tect lo­cal busi­ness, has had to set­tle for a scaled-down whole­sal­ing op­er­a­tion that’s been burn­ing cash in each of the last seven years. French mer­chant

Car­refour came in 2010, opened five stores, then left in 2014. Losses for Ger­many’s Metro have also per­sisted, 13 years af­ter it opened its first store. But In­dian su­per­mar­ket op­er­a­tor

D-Mart, which has turned a profit in each of the last 15 years, seems to have fig­ured out how to sat­isfy In­dian shop­pers. The chain gives cus­tomers far fewer choices of no-frills prod­ucts, en­abling it to ne­go­ti­ate bet­ter prices with ven­dors. It also re­fuses to spend on an­a­lyt­ics, loy­alty pro­grams, so­cial me­dia, or other new­fan­gled strate­gies. In­stead, it sells cheap stuff. “We’ve been do­ing just one thing. No dis­trac­tions,” says Neville Noronha, chief ex­ec­u­tive of­fi­cer of D-Mart par­ent Av­enue Su­per­marts. “On Sun­day evenings our stores are so crowded, it’s worse than a lo­cal train dur­ing peak hours.”

With only 94 stores, D-Mart takes a dif­fer­ent path from those of many lo­cal com­peti­tors, as well. In­dia’s big­gest su­per­mar­ket oper­a­tors, Fu­ture Retail and Re­liance

In­dus­tries, have ex­panded vig­or­ously over the past few years, open­ing 1,000 su­per­mar­kets com­bined. That’s caused them to clock tiny prof­its while pil­ing on debt. D-Mart has ex­panded more slowly, adding about 35 stores since 2013. But its rev­enue has grown faster. D-Mart sales for the year ended last March in­creased 38 per­cent from a year ear­lier, to 64.5 bil­lion ru­pees ($940 mil­lion), and will likely show a 29 per­cent in­crease when this year’s fig­ures are cal­cu­lated, Noronha says.

That’s buoyed D-Mart’s prof­itabil­ity. Ebit mar­gins, or profit be­fore in­ter­est and taxes as a per­cent­age of sales, were 6.1 per­cent for D-Mart in the last fis­cal year, com­pared with 5.9 per­cent at Fu­ture with its 400 stores and 2.4 per­cent for Re­liance’s 3,000 out­lets, which in­clude su­per­mar­kets and cloth­ing stores.

Wal­mart has yet to turn a profit in In­dia and logged a 2.3 bil­lion-ru­pee loss in 2014 from its 20 stores, which sell only to reg­is­tered busi­ness­peo­ple. Metro, which runs a net­work of 19 whole­sale stores, re­ported a loss of 1.1 bil­lion ru­pees in the year ended March 2015. A spokes­woman re­it­er­ated Metro’s goal of ex­pand­ing to 50 stores by 2020. Fu­ture and Wal­mart didn’t

re­spond to e-mails seek­ing com­ment.

With out­lets mostly con­cen­trated near Mum­bai, D-Mart squeezes more rev­enue from its stores than com­peti­tors—an es­ti­mated 24,000 ru­pees of sales per square foot, vs. 9,200 ru­pees at Fu­ture and 14,100 at Re­liance. “Other big re­tail­ers, they start hir­ing from the top, set up the head of­fice, ware­houses, and then even­tu­ally hire for the store. That kills it,” Noronha says. “When you start build­ing from the top, the cost will be too high.”

In­dia re­quires mak­ers of pack­aged goods to set a max­i­mum retail price, or MRP, for ev­ery item. Sell­ing prod­ucts— whether bath soap or cook­ing oil— for more than this pub­lished price is il­le­gal. The statute is meant to pro­tect con­sumers from wan­ton prof­i­teer­ing, but it also makes it “in­cred­i­bly dif­fi­cult” to prof­itably run a retail busi­ness, says Ashok Deena­day­alu, a con­sul­tant at Mithras Retail Ser­vices. That’s be­cause chains can’t charge more based on where items are sold—even when real es­tate or dis­tri­bu­tion costs are higher.

D-Mart’s draw for con­sumers is its prom­ise to sell goods below this price, some by as much as 12 per­cent; it sells gro­ceries plus a wide as­sort­ment of cheap house­hold items— school bags, cook­ing uten­sils, and the like—akin to a dol­lar store. “If you give cheap prices on ba­sic and com­mon prod­ucts, the per­cep­tion gets built that ev­ery­thing in the store is cheap,” Deena­day­alu says. “Cus­tomers come for the food but also buy a whole lot of other goods that have high mar­gins.”

Growth will come from new stores and trim­ming costs, but mar­gins are un­likely to in­crease much, Noronha says. “When you are in the busi­ness of value retail, it’s stupid to ex­pect any­thing more,” says the for­mer Unilever man­ager. “In a de­vel­oped coun­try, you can get away with mak­ing 30 and 40 per­cent gross mar­gins. Not here.”

−Adi Narayan and Rajhkumar K Shaaw

The bot­tom line For­eign re­tail­ers have had a tough time in In­dia. A lo­cal, D-Mart, uses su­percheap prices to win busi­ness.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.