DMart: Will it Regain its Leadership Position in the Indian Retail Industry?

Reliance Retail-pre Acquisition

Reliance Retail was established in 2006 as a retail subsidiary of Reliance Industries Limited. It was positioned as one of the fastest-growing retailers, ranked 53rd in the list of Top Global Retailers (The Economic Times, 2021a). Reliance Retail had a customer base of 150 million or more. In 2020, it recorded a remarkable footfall of more than 640 million across all its stores (Relianceretail.com, 2020). Reliance Retail had a digital presence through AJIO.com, a fashion and lifestyle store, and Jio Mart, which operated in the retail grocery segment. In FY2020–2021, Reliance Retail recorded gross revenue of ₹1,602.93 billion (USD 21.6 billion) for the financial year 2020–2021. It operated 12,711 stores in multiple formats across more than 7000 cities (Relianceretail.com, 2020).

Post-acquisition

Reliance Retail’s acquisition of Future Retail had taken a top position in the retail industry (see Exhibit 1). It owned a 7.05% stake in Future Enterprise Limited. The deal added 1,700 retail stores to Reliance Retail (Upadhyay & Desk, 2020), improving its reachability to approximately 600 million customers. After the acquisition, Reliance owned the largest retail chains, such as Big Bazar, Golden Harvest, Brand Factory, and DreamLine.

Future Retail

Future Retail Limited, known initially as Bharti Retail Limited, was the retail division of Future Group incorporated in the year 2007 (Business Standard, 2021). It was India’s third-largest organized brick-and-mortar retailer (Vardhan, 2021). It operated nine brands in 400 cities through 1,350 stores (futureretail.com). It was involved in the retailing of fashion and consumer products. It operated across various formats, such as a hypermarket (Big Bazaar), supermarket (Food Bazaar, Food Hall), fashion store (FBB), and convenience store (Easy Day). The company recorded a total income of ₹44.2489 billion (USD 6.0258 billion) in FY21. ¹ The company operated 290 Big Bazaar stores, 94 FBB stores, 9 Foodhall stores, 956 small-format stores (including 98 WHSmith stores), and one eZone store (Future Retail Annual Report, 2020). Big Bazar was a retail chain of hypermarkets founded by Future Group in 2001. In 2020, Reliance Retail acquired Big Bazar for ₹275.13 billion (USD 3.38 billion) (Sethi, 2021). The Big Bazar stores were located across India and operated online, contributing 30%–40% of the total sales (The Economic Times, 2021b).

Old Players

Some of India’s oldest players in the retail industry operated at a country and regional level. One of India’s oldest entrants in the retail industry was Spencer’s from the RPG group. It originally existed in the retail industry since 1863 and became the RPG group in 1989. ² Spencer Retail was first launched in the hypermarket format in 2000 in Hyderabad. It operated a chain of supermarkets that offered a wide range of grocery and non-grocery products. The company had a presence across 35 cities. ³ Another was Big Bazaar, founded by Future Group in the year 2001. In 2020, the Big Bazar was acquired by Reliance Retail for ₹275.13 billion (~USD 3.38 billion) (Sethi, 2021). The Big Bazar stores were located across India and also operated through an online channel, which contributed to 30%–40% of its total sales (The Economic Times, 2021b). Another player who entered the organized retail segment was Reliance Retail. It started as the retail division of Reliance Industries Limited in 2006 (Singhi et al., 2020). Following the acquisition of Big Bazar, Reliance Retail emerged as the leading retailer in India in terms of profitability and market capitalization. It operated across more than 7000 cities in India through its offline and online channels (see Exhibit 6a).

Many regional players in the retail industry were also growing their footprints across India. A retail chain by RPG Group included Foodworld Supermarkets, one of the oldest regional retailers, which was incepted as a division of Spencer & Co. in 1996 and later, in 2007, separated as an individual entity. The supermarket chain offered grocery products and was mainly operated in the South’s three major cities, including Chennai, Bangalore, and Hyderabad. Another regional retailer, Star by TATA Group, started in 2004. It was a retailer operating in multiple formats like Start Hyper, Star Market, and Star Quick, an online channel (starbazaarindia.com). It offered fresh food and groceries and operated in Hyderabad, Bangalore, Pune, Kolhapur, and Bangalore (starbazaarindia.com). Adding to the list, HyperCity was a chain of 20 hypermarkets incorporated in 2004, originally from Shoppers Stop. Later, in the year 2017, it was acquired by Future Group. It was present in major cities in India’s south, west, and north regions (Bureau, 2017).

Online Players

Flipkart was one of the oldest and first entrants in e-commerce retailing, which started in 2007. In 2018, Walmart acquired a 77% stake in Flipkart for ₹1,118.24 billion (~USD 16 billion). As of FY19, Flipkart had a turnover of ₹346.1 billion (~USD 4.66 billion). ⁴ In 2013, Amazon entered India through its subsidiary, Amazon India. Amazon India had a significant penetration in most of the regions in India. It had a community of more than 20,000 Indian sellers and operated 41 fulfilment centres in 13 states in India. ⁵ Amazon provided an online platform for more than 400,000 Indian sellers. It recorded a revenue of ₹108.476 billion (~USD 1.48 billion) in FY20 (Moneycontrol, 2020). Another emerging e-commerce retailer was Big Basket, founded in 2011. Tata Group acquired 64% stakes in the company (Ahmad, 2021). It recorded a revenue of approx. ₹38.18 billion (~USD 0.5143 billion) in FY21 (Bhalla, 2021). In addition, Grofers was an Indian online retailer that offered grocery delivery services. It was founded in 2013 and typically followed an e-commerce business model. The company gained revenue of ₹22.892 billion (~USD 0.3084 billion) in FY2020. Similarly, Jio Mart was a new entrant that started as a joint venture between Reliance Retail and Jio in 2019. Established in 2019, it operated as an online shopping platform offering groceries and daily fashion in over 200 cities ⁶ (see Exhibit 6b).

Foreign Players

Several foreign players held a significant market share in the Indian retail industry and continued to enter the Indian retail market. As of 2020, the cumulative FDI inflow in the retail space was recorded at ₹141.6196 billion (~USD 2.12 billion) (IBEF report, 2020). The largest global retailer, Walmart Inc., entered India in 2007 through its wholly owned subsidiary, Walmart India. It operated in the major cities of nine states across India through 29 B2B cash and carry stores (Wal-martindia.in, 2009). It had a market share of 4.3% as of FY 20 (Statista, 2020). In 2020, Walmart India was acquired by Flipkart, which gave the company access to cash and carry business (Bhalla, 2020).

Radhakrishna Damani

Radhakrishnan Damani, the founder and chairman of Avenue Supermart Ltd, started his journey as a trader and later gained recognition as a prominent investor on Dalal Street. Inspired by the legendary value investor Chandrakant Sampa, he invested in multinational stocks and became one of the leading stock-market investors in the country during the 1980s and 1990s. According to Forbes’ Real-Time Billionaires Index, Radhakrishna Damani was ranked India’s fourth richest person, with ₹1,157.676 billion (USD 15.6 billion). ⁷ Famously known as Mr White and White, Radhakrishna Damani lived a simple life away from media and gatherings. Radhakrishna Damani was known for his low-profile but winning traits. As a value investor, his perception of conservatism was reflected in the DMart business model. He followed the philosophy of slow expansion, value for people, and going local, and did not believe in spending on advertisements (Vijayraghavan & Malviya, 2021).

Business Model

DMart offered products in three categories: grocery, non-grocery, and general merchandise. The product offerings primarily consisted of essential items integral to people’s daily lifestyle needs rather than discretionary products. This categorization ensured a steady flow of customers throughout the year since these products were less susceptible to seasonal variations or temporary economic downturns like the pandemic. The company operated on a unique value retailing proposition and offered low product prices, i.e., an EDLP strategy. DMart’s expansion into Tier-II cities enabled the company to tap into a broader market and cater to the needs of consumers belonging to the lower middle, middle, and aspiring upper-middle-income segments. These individuals placed great importance on obtaining value for their money when making daily shopping choices (Axis Securities Report, 2020). Furthermore, DMart charged manufacturers a ‘slotting fee’ or an entry fee to have their products available in the supermarket format. The company followed the B2C (business-to-consumer) model, making bulk purchases directly from manufacturers and eliminating the need for distributors and wholesalers.

Financials

DMart’s business model remained firm and had a strong financial standing. In FY2020, the company reported a revenue per square foot of USD 444.36 and a net profit of ₹13.01 billion (~USD 0.1753 billion). DMart excelled in cost management, maintaining a high inventory turnover ratio and low inventory turnover days. These practices effectively minimized inventory-carrying costs. The sale cycle of DMart was 31 days, indicating that it took 31 days to clear the stock, reflecting a quick sale and high demand for products. In FY20, DMart reported an inventory turnover ratio of 9.96, surpassing the industry’s average of 7.3 for the same year. The company implemented other cost control measures, including a preference for contractual employees, which accounted for 80% of the total workforce, while permanent employees constituted only 20%. This approach helped keep employee costs at just 4% of net revenues. Additionally, the company owned most of its stores. Thus, DMart benefited from the low rental expenses. Compared to its competitors, the company effectively prevented spending on advertising and promotion while controlling operating expenses.

DMart followed an asset-heavy business model, with around 90% of its stores owned directly by the company. The remaining stores were operated through long-term leases of over 9 years. By adopting this approach, DMart could focus on improving productivity without concern about rental expenses or other rising costs. This strategy proved especially advantageous for segments that typically required longer to gain momentum and reach profitability. Despite its asset-heavy structure, the company consistently maintained a commendable asset turnover rate of approximately five times. This performance was driven by the effective implementation of its EDLP strategy and the ability to keep operational costs lower than its industry peers (Axis Securities Report, 2020).

Furthermore, despite operating with lower gross margins and higher capital employed, the company consistently achieved an average ROCE (return on capital employed) of around 20% and an average ROE (return on equity) of approximately 15% during FY12–20. This performance was attributed to DMart’s emphasis on value retailing, which allowed them to maintain an industry-leading asset turnover rate of approximately four times compared to the industry average of three times. As a result, DMart successfully maintained superior ROE and ROCE within the industry (Axis Securities Report, 2020) (see Exhibit 7).

Stock Performance

Stocks reflect future earning possibilities and growth of a firm that was discounted in the current market price (CMP). An increase in stock prices also reflected that the investors demanded stocks, resulting in price rises. In 2017, DMart launched its IPO at ₹18.7 billion, listed at ₹604.40 per share, given a return of approximately 102% from its issue price (Moneycontrol, 2017). Based on the CMP, the stock’s valuation was 41 times EBITDA. This valuation appealed due to the robust revenue growth and significant room for further expansion. However, the stock return showed a lower-than-expected revenue performance in FY21. In FY2019–2020, DMart outperformed the market index return proxied by Sensex (Axis Securities Report, 2020).

Everyday Low Price

Inspired by Walmart’s global retail strategy of EDLP, DMart consistently offered its customers low prices on a daily basis (an average of ~10%) (edelweissresearch.com, 2019). The retailer followed this strategy and offered the lowest price on the goods every day. Generally, retailers discounted the goods occasionally, such as on festivals, end-of-season sales, and flash sales. It was considered one of the best strategies to retain and maintain customer loyalty and enhance sales (Harihar, 2021). DMart’s key objective was to offer its customers all grocery, non-grocery, and general merchandise at low prices daily (EDLP). This strategy helped to accelerate revenue growth, capture customers, and expand the business. To successfully implement the EDLP strategy, DMart focused on efficient operations, cost minimization, and optimization. This was achieved through a cluster-based expansion approach, a robust supplier network, stringent control over operating expenses, inventory management, payables, and the ownership of stores.

Store Network and Expansion

The company’s diversified store presence across India’s western and southern regions enabled it to capture a large customer base (see Exhibit 8). Over the past 20 years, DMart expanded to 214 stores (Roy, 2020). The company adopted a cluster-based expansion strategy, effectively reducing distribution and inventory costs, thereby improving profit margins and strengthening its market presence in existing areas. This approach also enabled DMart to extend its reach by establishing new stores in different markets (Axis Securities Report, 2020). Approximately 53% of the total stores were situated in Maharashtra and Gujarat. This helped control the network of supply chains and warehouses, thus optimizing the costs and minimizing the market demand risk.

DMart stores were predominantly situated in densely populated suburban areas. They were established in three formats: hypermarkets, spanning 30,000–35,000 sq. ft; express formats, covering 7,000–10,000 sq. ft; and supercentres, spread over 1 lakh sq. ft. As a part of its cluster-based expansion strategy, DMart opened more stores in the same suburban areas and opted to own these stores instead of renting them. DMart’s rental model (wherein they owned 90% of the properties or leased 366 stores for 30 years) allowed the creation of an asset base that eliminated approximately 5%–7% of the operating expenses (Renjhen, 2017). These strategies and models played a crucial role in enabling the company to offer products at a lower price. Also, it helped generate higher revenue per square foot of ~ USD 444 compared to ~USD 350 of Reliance Retail.

Tangible and Intangible Resources

DMart had strategically positioned itself to deliver value to its customers. It possessed valuable resources, including its brand name, widely recognized consumer awareness of its EDLP strategy, and a strong presence of brick-and-mortar stores in tier-II and tier-III locations where major players had limited presence. Most stores were primarily located in densely populated or market areas with a strong logistic network. In addition, DMart’s minimal indulgence in branding and advertisements saved costs and provided discounted goods. DMart had intangible resources such as a well-established supply chain network, strong financials, a prominent position in the retail market, leadership expertise, and advantageous geographic locations. The tangible resources owned by DMart included a portfolio of owned or leased stores and inventories.

Moving Beyond Strongholds

DMart achieved market leadership in the organized retail industry through a combination of factors, including a significant number of stores, scale and distribution, and a low-cost structure. However, the marriage between two of the largest retailers in India accelerated the syndicated revenues of Reliance Retail, surpassing that of DMart by 2.5 times (Pinto, 2020). As a result, this posed a challenge to DMart’s position as a leader in the grocery retail market. Consequently, the retail industry witnessed a surge in intense competition, further amplified by the challenges posed by the COVID-19 pandemic, which affected the entire industry.

Stronger than ever, Reliance Retail had an edge over DMart in several aspects, positioning it as a direct competitor. The acquisition enabled Reliance Retail to expand its market presence across various retail formats and categories. Future Group’s businesses, including popular retail chains like Big Bazaar and FBB, had a broad customer base and a strong network of stores. This allowed Reliance Retail to tap into new markets, reach more customers, and strengthen its market share. On the other hand, where DMart had a strategic advantage of cluster-based expansion, it had a limited spread across southern and western regions, with over one-third of its stores in Maharashtra. This posed a challenge to compete with Reliance Retail regarding market share and market presence.

Reliance Retail had a strong online presence with the online venture Jio Mart, which was ready to take over the e-commerce operation (Robert, 2021). At the same time, the increasing digital adoption and competition from other e-commerce players necessitated the expansion of e-commerce operations beyond DMart’s offline store format, presenting an additional challenge. The changing buying patterns of customers during the COVID-19 pandemic further emphasized the need to embrace the omnichannel model as it became a habit for customers and provided insight into the future of retailing in India. This presented a significant challenge for DMart in addressing the competition and maintaining its position in the Indian retail industry. Additionally, considering the conservative pace of expansion, whether DMart would transition from being a regional retailer to a national one against Reliance Retail was a strategic concern for DMart. Within the e-commerce segment, there were concerns about how DMart would compete with emerging e-commerce giants such as Jio Mart, Amazon, Flipkart, Big Basket, Grofers, and others.

Sustainability of EDLP and Competitive Advantages in the Current Landscape?

DMart’s EDLP strategy was a significant strategic advantage. DMart offered its products at 6%–7% lower prices than other offline retailers. However, sustaining the EDLP strategy posed a challenging task, especially for a company selling grocery and FMCG products with low profit margins that depleted capital rapidly and could lead to unprofitable operations.

Alarmingly, in Q1 FY21, DMart experienced an 88% decline in profits, plummeting from USD 45.06 million to USD 6.46 million (Dash, 2020). This significant profit drop raised concerns about DMart’s ability to continue following the EDLP strategy while maintaining its financial standing. Any strategic shift away from value retailing or the failure to provide daily discounts in line with the EDLP pricing strategy put the company at risk of losing its distinct advantage and, consequently, a significant share of customers. Such an impact would undoubtedly affect DMart’s business and financial health. The sustainability of competitive advantages based on existing resources was another concern in the competitive landscape. For instance, expanding to larger cities and online channels to achieve scale might have implications for cost incentives in closed locations and strong networks. Therefore, given the prevailing circumstances in the retail industry, the sustainability of the EDLP strategy for DMart became questionable.

Current Scenario

With the changing dynamics of the Indian retail industry due to the emergence of giant players and e-commerce startups, DMart might have faced challenges from various fronts. Despite having competitive advantages and a different target segment, not everything favoured DMart for future growth. For instance, according to Neville Noronha, DMart reported a significantly high EBITDA margin of approximately 8.6% in FY20. ⁸ Considering this margin, there was no further scope for growth if DMart intended to uphold its market-leading prices while effectively competing with both online and offline competitors. Furthermore, from FY14 to FY20, DMart experienced a steady decrease in same-store sales growth (SSSG), dropping from 26% to 10.9%. This decline in SSSG was primarily attributed to the reduced incremental revenue growth observed in stores older than 5 years. This had pressured DMart to add more stores (Roy, 2020). Also, the demand in existing regions had reached a saturation point, and DMart needed to catch up with its competitors and expand into new geographies. DMart had taken the initiative to pace up with changing retail industry dynamics. DMart Ready was introduced by DMart in 2016 to offer customers an omnichannel experience. However, its locational restriction to Mumbai, comparatively high delivery charges, and the absence of same-day delivery options hindered its ability to gain traction. As a result, DMart Ready recorded sales of only ₹3.54 billion (~USD 0.0477 billion) and experienced a significant loss of 57% (Malviya, 2021).

After the acquisition, Reliance Retail became a formidable player in the retail industry and shifted its focus to DMart’s market territory. Leveraging its substantial financial resources and extensive nationwide presence of 797 stores, Reliance Retail achieved remarkable growth in the grocery segment. With a strong omnichannel presence facilitated by Jio Mart, Reliance Retail had successfully captured a significant share of India’s organized grocery market, surpassing DMart’s market share of 23.1% with an impressive 29.4% share. Further, the competition intensified with the COVID-19 pandemic, significantly changing the retail industry. Therefore, the critical question that Neville Noronha needed to address was the potential consequences of following the current strategies in the future to regain DMart’s leadership position. This raised the question of whether the company would transition from being a regional retailer to a national one and how it would compete in the retail e-commerce segment against giants like Jio Mart, Amazon, Flipkart, Big Basket, and Grofers. Consequently, the sustainability of the then-current strategies and resources and the necessity for business model innovation became prominent questions that needed to be addressed by DMart.