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