D-Mart, India’s most famous deep discount retail chain, said it is working on expanding its footprint beyond its current footprint of 214 locations, but the ongoing COVID-19 will impact the number of new stores that will be opened this year.
The company, which started with just two stores in Mumbai in 2002-03, expanded to 214 stores spread over 12 states as of March this year.
It has been pressing down hard on the accelerator in recent years, adding a whopping 38 stores last year.
However, Avenue Supermarkets, as the company is called, follows a model in which it focuses tightly on costs, and has traditionally abhorred any expansion strategy that has the potential in increase costs.
As such, it does not take buildings on lease, but prefers buy land, construct the building and start its store.
Not only is this a more expensive way to expand, but also a slower one. A new D-Mart store takes anywhere from 2 to 3 years from land acquisition to inauguration.
However, the company has to adopt this strategy to keep its costs– and therefore its prices — low. As a result, D-Mart is easily India’s most recognized discount retailer of daily goods, including grocery, small appliances and basic garments.
Interacting with investors after the company’s FY20 and Q1 FY21 results, CEO & MD Navil Noronha said work is going on to expand the company’s network into new cities. However, he did not give details, potentially due to competitive reasons.
“You’ll hear about it as we launch…we are working on it,” he said.
At the same time, Noronha said construction activities have been hit by the Coronavirus lockdown and the social distancing norms imposed in its wake. Because of this, he said, some store openings slated for this year will have to be pushed to the next.
“We have a decent inventory of store acquisitions,” Noronha said. He pointed out that the company was able to open 38 stores last year because of some ‘rollover’ from the previous year, when it was able to open only 21 stores. Something similar is likely to play out this year and the next, he indicated.
In the last two years, Noronha said, the company opened 59 stores, and if the tally for the ongoing year (FY21) and next year are to be combined, the number will be in the same range.
Meanwhile, he said, the company will continue to stick to the ‘cluster-based’ approach that has guided its expansions from the first store, and will not open isolated stores.
In other words, D-Mart will not open stores that are too far from each other to benefit from economies of scale when procuring, storing and supplying materials — a kind of hub and spokes model where a particular center is in charge of several stores in its vicinity.
BIGGER IS BEAUTIFUL
However, the CEO also said D-Mart has modified its strategy and model as it has grown, particularly in terms of the size of its newly opened stores.
While its earlier stores used to be around 30,000 square feet in size, nowadays, he says, it’s closer to 50,000 sq ft.
Larger stores, he said, is giving his company better returns in the medium- and long-term.
“As the brand has become more and more mature, whichever cities we are going to, we are hitting larger, absolute sales numbers much earlier. To allow the store to maintain a decent growth for a longer period of time, we decided that we’ll open larger stores. Better infrastructure leads to better growth for a longer period of time.”
He pointed out that small stores tend to ‘peak out’ faster, as they are unable to support more and more customers. In fact, D-Mart stores are likely among the most crowded retail properties in India.
Smaller stores, he said, find it difficult to keep growing purely because of their physical inability to support more customers.
“..The CAGR [growth rate] just flattens out, to single digits or thereabouts. It will just grow at inflation rate or lower. To take care of that, we’ve been opening larger stores,” he said.
The key downside to opening larger stores is that the company’s initial, construction-related costs are higher.
However, if one looks at the capital expenditure needed to put up a large store in relation to the revenue generated by the store, it actually tends to be lower and therefore more economical.
In other words, to double the revenue (and profit) generated by a store, the company does not have to double its investment in it.
“It’s not a proportionate increase in capital expenditure. The relative increase in capital expenditure because of incremental construction costs is lesser. So it makes business sense to open larger stores.
“The simple underlying principle is, do I get the top line. If the top line is available, then opening larger stores makes a lot of sense,” he pointed out.
In addition, larger stores can also have higher margins because of the larger variety of goods that can be sold in them. Retailers like D-Mart get a higher margin on items like garments and appliances than on grocery items like grains and biscuits.
“Our ability to sell higher-margin items — general merchandise, apparel — becomes better [with a larger store]. Our ability to showcase becomes better without doing fancy investments in capex,” he pointed out.
“The first two years, the benefit is actually lesser than having a smaller store…In the shorter term, it may not be very profitable, but it gives you a far better run rate, a more profitable CAGR, in the long term..kicks in an accelerated ROIC in the longer term, and that’s the reason why we’re doing this.”
COVID-19 & MALLS
Noronha also pointed out that the company is no longer averse to looking at rental properties, given the correction seen in the real estate market.
Many malls in India are facing stress as India’s booming e-commerce sector has taken a big bite out of the brick-and-mortar retail market, impacting the profitability of companies like Future Group, one of the biggest customers of malls thanks to its Big Bazaar chain of super markets and other related properties.
The COVID-19 pandemic has turned the situation from bad to worse for commercial real estate companies, particularly those focused on malls and retail properties.
“We have changed our position on leasing,” Noronha said, adding that D-Mart was “getting a lot of inward inquiries, mostly from malls”.
“Post COVID, mall leasing has become extremely soft,” he added.