DMart is BEST at squeezing every little inch of profit margin!
- Reliance makes ~6x the revenue of DMart
- But DMart has 2.8x the profit margin of Reliance.
- While it makes 2x the profits per sq ft.
Here's how DMart's business model maximizes its profits! ๐งต
- Reliance makes ~6x the revenue of DMart
- But DMart has 2.8x the profit margin of Reliance.
- While it makes 2x the profits per sq ft.
Here's how DMart's business model maximizes its profits! ๐งต
Structure:
1. How did DMart come to be?
2. The business model behind DMart's low prices!
3. The consumer angle: Why do bargain-loving ladies love DMart?
4. Reliance Retail vs DMart
5. DMart is now online, but can it maintain its profitable streak?
1. How did DMart come to be?
2. The business model behind DMart's low prices!
3. The consumer angle: Why do bargain-loving ladies love DMart?
4. Reliance Retail vs DMart
5. DMart is now online, but can it maintain its profitable streak?
1/ How did DMart come to be?
DMart was founded way back in 2022 by stock broker turned entrepreneur and now billionaire Radhakishan Damani.
DMart never dreamt of becoming a large supermarket chain.
The first store was built in Powai on a fairly small property.
(contd.)
DMart was founded way back in 2022 by stock broker turned entrepreneur and now billionaire Radhakishan Damani.
DMart never dreamt of becoming a large supermarket chain.
The first store was built in Powai on a fairly small property.
(contd.)
But, a few things were clear to Damani from the very beginning:
a. He wanted to replicate Walmart's low margins model
b. He wanted to sell top products at great value
c. He wanted to run a company with positive unit economics.
So it was time to execute these 3 points.
(contd)
a. He wanted to replicate Walmart's low margins model
b. He wanted to sell top products at great value
c. He wanted to run a company with positive unit economics.
So it was time to execute these 3 points.
(contd)
1 store expanded into 10, and DMart was already challenging Big Bazaar's 250 stores.
Soon enough, it gathered more market share to become India's second-largest grocer.
It IPO'd in 2017 at an IPO size of INR 1870 Cr. Today, DMart's market cap has risen to INR 2,51,00 crores!
Soon enough, it gathered more market share to become India's second-largest grocer.
It IPO'd in 2017 at an IPO size of INR 1870 Cr. Today, DMart's market cap has risen to INR 2,51,00 crores!
2/ The business model behind DMart's low prices!
Damani's main strategy with DMart was to focus on 1 main customer need โ heavy discounts!
So, all the business specifics were aligned towards:
a. giving heavy discounts
b. keeping a fatter-than-usual profit margin
(contd.)
Damani's main strategy with DMart was to focus on 1 main customer need โ heavy discounts!
So, all the business specifics were aligned towards:
a. giving heavy discounts
b. keeping a fatter-than-usual profit margin
(contd.)
1. Owning Store Space
There are 3 main differentiators:
A. Instead of renting, DMart directly buys the store space
B. The stores are not located in malls or residences but are standalone buildings.
C. The average size of these stores is ~40,000 sq ft
(contd.)
There are 3 main differentiators:
A. Instead of renting, DMart directly buys the store space
B. The stores are not located in malls or residences but are standalone buildings.
C. The average size of these stores is ~40,000 sq ft
(contd.)
The policy of owning the store saves DMart a lot of rent money that can go up to 5-7% of the retailer's revenue.
In the case of DMart, real estate becomes a one-time expense
2. Cluster Expansion Model
Another huge difference is DMart's expansion strategy.
(contd.)
In the case of DMart, real estate becomes a one-time expense
2. Cluster Expansion Model
Another huge difference is DMart's expansion strategy.
(contd.)
Reliance can't squeeze in more profit margins, nor can it handle huge footfall in a single store.
So, the only way to increase volumes is through rapid store expansion.
Reliance Retail for instance has ~17000+ operational stores.
Compare that to DMart's 284 stores.
(contd.)
So, the only way to increase volumes is through rapid store expansion.
Reliance Retail for instance has ~17000+ operational stores.
Compare that to DMart's 284 stores.
(contd.)
Now, Like Walmart, DMart only expands its stores in clusters.
Meaning, it first establishes a distribution centre in a new locality and then builds stores around it.
This helps them efficiently manage their supply chain and inventory.
(contd.)
Meaning, it first establishes a distribution centre in a new locality and then builds stores around it.
This helps them efficiently manage their supply chain and inventory.
(contd.)
3. Low Pricing
The third USP of DMart is its super low prices. This is a result of several different initiatives.
A) Slotting Fees โ This is the fees brands pay DMart to get their products on DMarts shelves, hoping to increase visibility and sales.
(contd.)
The third USP of DMart is its super low prices. This is a result of several different initiatives.
A) Slotting Fees โ This is the fees brands pay DMart to get their products on DMarts shelves, hoping to increase visibility and sales.
(contd.)
B) Low-Cost Price โ DMart's credit cycles are super quick.
It pays back vendors the owed amount in just 7 days while others take more than a month. So, vendors offer DMart lower prices.
C) Low Expenses โ DMart operates on very lean management with no extra costs.
(contd.)
It pays back vendors the owed amount in just 7 days while others take more than a month. So, vendors offer DMart lower prices.
C) Low Expenses โ DMart operates on very lean management with no extra costs.
(contd.)
D. Huge Product Mix โ DMart sells a variety of different products, so people buy a few high-margin products along with their usual low-margin products.
E. Large Sales Volume โ They only sell top products that save a ton of money on inventory and keep the sales numbers high!
E. Large Sales Volume โ They only sell top products that save a ton of money on inventory and keep the sales numbers high!
3/ The bargain-loving ladies love DMart
This model not only benefits DMart but also heavily benefits their customers.
All the extra value they get and the additional margins are used to provide heavy discounts to customers.
Let's look at 2 different scenarios:
(contd.)
This model not only benefits DMart but also heavily benefits their customers.
All the extra value they get and the additional margins are used to provide heavy discounts to customers.
Let's look at 2 different scenarios:
(contd.)
1) Bulk buyers โ These are the people that buy a month's worth of groceries at once.
When they visit, DMart makes a huge amount of sales. At the same time, these buyers save on every item they purchase.
So, the more they buy in advance, the more they save.
(contd.)
When they visit, DMart makes a huge amount of sales. At the same time, these buyers save on every item they purchase.
So, the more they buy in advance, the more they save.
(contd.)
2) Non-bulk-buyers โ Let's say these buyers are on a budget and can only afford to buy a couple of days' worth of groceries.
In this case, DMart doesn't make a lot of money, but these buyers still get a better deal than the local retail store.
(contd.)
In this case, DMart doesn't make a lot of money, but these buyers still get a better deal than the local retail store.
(contd.)
Buying at DMart also helps improve their marginal savings.
Examples:
- If someone makes INR 1000/week
- Spends INR 800 at local retail stores
- Considering a 25% lower price, he'd only spend INR 600
- This doubles their weekly savings from INR 200 to INR 400
Examples:
- If someone makes INR 1000/week
- Spends INR 800 at local retail stores
- Considering a 25% lower price, he'd only spend INR 600
- This doubles their weekly savings from INR 200 to INR 400
4/ Reliance Retail vs DMart
Now, this entire piece begs the need to ask a critical question โ if DMart is so great, then why is it not the top grocer in India? And, how come Reliance Retail beats it?
To understand this, we must look at their FY22 financials.
(contd.)
Now, this entire piece begs the need to ask a critical question โ if DMart is so great, then why is it not the top grocer in India? And, how come Reliance Retail beats it?
To understand this, we must look at their FY22 financials.
(contd.)
Reliance
- Revenue = INR 1,90,000 Cr
- Profits = INR 4935 Cr
- Store area = 54.5M sq ft
- Margins = 2.6%
- Profits per sq ft = INR 905
DMart
- Revenue = INR 30,353 Cr
- Profits = INR 2181 Cr
- Store area = 12.1M sq ft
- Margins = 7.2%
- Profits per sq ft = INR 1802
(contd.)
- Revenue = INR 1,90,000 Cr
- Profits = INR 4935 Cr
- Store area = 54.5M sq ft
- Margins = 2.6%
- Profits per sq ft = INR 905
DMart
- Revenue = INR 30,353 Cr
- Profits = INR 2181 Cr
- Store area = 12.1M sq ft
- Margins = 7.2%
- Profits per sq ft = INR 1802
(contd.)
DMart's profit margin is ~2.7 times Reliance and their profit per sq ft is 2x that of Reliance.
So, even though Reliance leads in revenue and market share, it's overall less efficient and profitable than DMart.
(contd.)
So, even though Reliance leads in revenue and market share, it's overall less efficient and profitable than DMart.
(contd.)
Comparing Inventory Turnover Ratios
A good indicator of efficiency is their relative turnover ratios.
The ratio basically tells you how many times a company sells their inventory in a year.
Inventory Turnover Ratio:
โ Reliance Retail = 1.27
โ DMart = 2.47
(contd.)
A good indicator of efficiency is their relative turnover ratios.
The ratio basically tells you how many times a company sells their inventory in a year.
Inventory Turnover Ratio:
โ Reliance Retail = 1.27
โ DMart = 2.47
(contd.)
Assuming both parties have the same batch of inventory size, the no. of days it takes to sell a batch of inventory is:
Reliance Retail = 365 days/ 1.27 = ~287 days
DMart = 365 days/ 2.47 = ~148 days
Let's say, both have the same:
- inventory
- cost price
- margins
(contd.)
Reliance Retail = 365 days/ 1.27 = ~287 days
DMart = 365 days/ 2.47 = ~148 days
Let's say, both have the same:
- inventory
- cost price
- margins
(contd.)
1. If DMart sells Rs X worth of products each day
2. Then, Reliance Retail makes => INR X x (148/287) = INR 0.515X
3. So, DMart makes => (X - 0.515X)/X x 100 = 48.4% more revenue each day for each sq ft of store space all thanks to its marginally better turnover ratio.
(contd)
2. Then, Reliance Retail makes => INR X x (148/287) = INR 0.515X
3. So, DMart makes => (X - 0.515X)/X x 100 = 48.4% more revenue each day for each sq ft of store space all thanks to its marginally better turnover ratio.
(contd)
Many experts predict that DMart could soon expand to 1500 stores all over India.
If they can maintain their profit margins then increasing stores will have a huge impact.
Now, Reliance Industries and its super deep pockets can undertake such bold expansions.
(contd.)
If they can maintain their profit margins then increasing stores will have a huge impact.
Now, Reliance Industries and its super deep pockets can undertake such bold expansions.
(contd.)
It even bought Big Bazaar's parent company, increasing its total market share to ~50%+.
But, DMart has to sustain itself with its earnings.
So, as always, it's safe to assume they would be expanding slowly with care, always keeping their profitability as the first priority!
But, DMart has to sustain itself with its earnings.
So, as always, it's safe to assume they would be expanding slowly with care, always keeping their profitability as the first priority!
5/ DMart is online, but can it maintain its profitable streak?
The new online grocery startups are taking away DMart's market share.
So, in order to compete with them online, they created DMart Ready.
But, DMart wants to fight the online battle on its own terms.
(contd.)
The new online grocery startups are taking away DMart's market share.
So, in order to compete with them online, they created DMart Ready.
But, DMart wants to fight the online battle on its own terms.
(contd.)
It doesn't participate in the free-delivery practice and to cut down on delivery costs, it asks customers to pick up packed products from its DMart kiosks!
Ultimately, its top priority is to fix its unit economics and turn profits.
(contd.)
Ultimately, its top priority is to fix its unit economics and turn profits.
(contd.)
So, will DMart Ready be the first online delivery platform that's profitable?
Well, we are yet to see how DMart figures this out. But, it'll surely be an exciting journey! ๐
Well, we are yet to see how DMart figures this out. But, it'll surely be an exciting journey! ๐
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Small Correction: DMart was founded in 2002 and not in 2022.
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