Chasing growth, D-Mart rethinks store strategy

Mumbai: India’s most valuable retailer is choosing to veer away from its time-tested business rules as it chases growth. Avenue Supermarts Ltd, owner of D-Mart, is looking to accelerate profit and revenue growth by opening 30 stores annually from an average of 20 stores in the last two fiscals. For this, it is willing to compromise on certain basic tenets of its business such as owning its stores and focusing only on brick and mortar.

“We have progressed from opening around 10 stores per annum historically to 15-20 stores. There is an opportunity for us to at least reach 30 per annum. That much is possible,” said Neville Noronha, managing director and chief executive officer of Avenue Supermarts.

The firm, which listed in March 2017, shot into the limelight with 114% gains on listing day as investors welcomed its rather unadventurous but highly profitable business model.

In the first nine months of this fiscal, D-Mart posted a 28% gain in revenues and a 60% jump in net profit. Yet investors are hungry for more. The D-Mart stock is trading at 71.37 times expected earnings for the next 12 months and has seven “sell” ratings compared to four “buy” and “hold” ratings.

To accelerate growth, Noronha said D-Mart is willing to forgo owning its stores.

So far, the company has followed an ownership or long-lease model, which has helped cut costs and boosted margins. Since the beginning of fiscal 2018, D-Mart has maintained gross margins of at least 7.5%, compared to the 3-4% margins of its nearest rival, Future Retail Ltd.

The firm is best known for its “everyday low cost, everyday low price” strategy, allowing it to extend near-permanent discounts to customers on a daily basis. This helps it to churn inventory quickly and aids profitability.

However, challenges in acquiring land at suitable locations, getting necessary permissions and requisite approvals has prompted the shift in strategy.

“That’s why we’ve been a little less stringent,” Noronha said, adding, “if you would have said eight years back, whether we want to do a lease, we would have downright refused. Today... we are open to it.”

D-Mart is eyeing the states of Andhra Pradesh and Telangana for its next round of expansion. As of 31 December, the company had 141 stores. At the end of fiscal 2017, as many as 68% of its stores were located in Maharashtra and Gujarat.

The push comes at a time when the pace of store addition hasn’t been particularly impressive. For the nine months ended December, D-Mart added 10 stores.

“Speed of opening new stores has to improve. There is an opportunity to do better there,” Noronha had said when the December quarter results were announced.

By compromising on the firm’s basic tenets, he has addressed analysts’ concerns.

“Slippage in store additions as seen in 9 months FY18 (and) limited ability to increase store additions to maintain growth contribution from new stores” will constrain sales growth, wrote IIFL analysts in a 1 February report.

D-Mart is also looking to ramp up its e-commerce presence.

In January this year, Avenue Supermarts turned its e-commerce venture, Avenue E-commerce Ltd, from an associate company (related to the parent via promoters) to a wholly owned subsidiary. D-Mart promoter Radhakishan Damani owns a controlling stake in this firm.

D-Mart has also recently stepped up promotional activity, and the company is seeing more traction at its “click and collect” kiosks.

Apart from click and collect, the company is running home delivery pilots in “D-Mart dark areas” in Mumbai—neighbourhoods in the city where D-Marts don’t exist. The company charges for its home deliveries and is mainly focused on groceries.

soumya.g@livemint.com