Hi everybody. DMart has been one of the most disruptive companies in the food retail industry of India. Ever since it went IPO in 2017, In just four years, demand share price shot up by 580 percent going from just 616 rupees to more than 4200rupees in 2021. And the most astonishing thing about DMartis that in its 19 years of existence, it had not closed a single store until the pandemic hit. And in spite of having giant competitors like future retail and reliance retail, its profits have skyrocketed by 1700% going from just60 crores in 2012 to more than 1000 crores in 2021.
And this begs the question, how did the mind become such a dominating force in the retail industry? How did they compete and beat the giants like reliance retail and future retail? And what are the lessons that we need to learn from a retail mastermind like Radhakishan Damani. The first and perhaps the most important element of demand growth is nothing but price, price and price. And if you ever visited a demand store, you will not seen that the store is not fancy. The items it sells are not fancy, nor is it located in a fancy location like a mall.
And yet, our parents have gone out of the way just to shop at DMart, our moms would schedule all of their work just to make time to go to the market. And in spite of having a kirana store right outside. If something is out of stock, they will tell you note it down and we will go and buy it when we go to Dmart. Now this extraordinary level of efforts that they take is because DMart prices are always 6% to 15% lower than the MRP. The question is, how does this 6% to 15% discount make such a big difference? I mean, to most people are watching this video,it would make sense if there is an 80%.
Discount at Zara’s and then somebody is taking so much efforts. But why so much efforts for penny discounts like 6% to 15%? Well, the answer to this question lies in this 20 year old accounting page of my parents. Back then in December 1993, my parents had a combined income of 5458 rupees per month. And if you look at the savings, it was just183 rupees, that’s it. And this is also a month where in there were fortunately no guests. So if daddy or the inlaws came over, this will go down to zero or sometimes even in the negative. And if it went into the negative, my father would have to take out a loan from the provident fund, just to manage the day to day expenses at home.
So obviously, there are hardly any savings,no emergency fund and no investment. Therefore, the little savings that they gotis their emergency fund. It is their extra expense for the doctor’svisit, and it is the hospitality fund for the guests. This is the state of more than 80% of ourpopulation. And now if I’m bringing 15% DMart discounton groceries, you will see that the savings shoots up to 243 rupees, which means whatmerely by visiting the demand store four times a month, a lower middle class family savings could increase by 30%. And this is a big, big difference.
This is a reason why DMart commands an extraordinarylevel of brand loyalty from the Indian middle class consumers. Now this begs the question if DMart couldoffer such low prices, why couldn’t the shopkeepers do so and what was so special about DMartbusiness strategy and this is what brings me to the second part of the episode and thatis deep discounting. Now if you watch the Walmart episode, youalready know about deep discounting, but if you haven’t done it yet, here’s how this milliondollar strategy plays out. Let’s take the example of one litre of ghee. Now Gowardhan ghee sells at an MSRP of 579rupees per litre.
So, if 1000 packets gets sold for 579 rupees,each with a profit of 87 rupees assuming 15% profit margin for the retailer, then the totalprofit is about 87,000 rupees, but if the same key is sold at 529 rupees, although theprofit is only 37 rupees, due to the discount, the volume of the sales is expected to shootup to 1500 packets giving a profit of 55,500 rupees. Now, although this might look like less profit,it has some incredible benefits that very few retailers understood back then. Number one, it results into more volume insales, which means more people came to the store to buy ghee and since demand has a tonneof other products also, it is more likely.
That people will buy something else also alongwith the ghee and this is what we call as the product assortment strategy. Number two, the inventory starts moving ina flash speed. So if you’re the retailer, like DMart, youwill quickly sell your ghee and you will get fresh stock on the shelf. This means that there’ll be no expired products,very less wastage and customers would love to buy from you because you only sell freshstock and most importantly, you as a retailer get a better bargaining power with your sellersif your inventory moves faster. For example, if other players buy 10,000 units,you can buy 20,000 units from your suppliers.
Because of our accelerated sales volume. And using this bigger purchase order, youcould ask the seller to reduce the price by another 10%, which would give you a 10% extraprofit, even with the best prices in the market. Now for a small store, that’s only 10% increasein margin, but when DMart scaled it up while applying this technique, they became so powerfulthat they started dominating the sellers and started crushing the other retailers. For example, in the present day, if the wholesalersells 2000 packets of ghee to a small retailer at 499 rupees with 200 rupees of profit, DMartwill place an order for 20,000 units and it will ask the seller to sell it at 399 rupees.
And because it’s such a huge purchase order,it gives the seller more profit at once. So they agree. Now in normal retailers price there 499 rupeespurchase at 579 rupees which is the MRP, DMart sells its products at 499 rupees, which meanswhat the selling price of demand is lesser or equal to the cost price of the retailersmaking it impossible for them to compete with DMart. And hence, DMart makes a healthy profit of100 rupees per unit in spite of offering the lowest prices in the market. This is a superpower of discounting.
Now the question is DMart is able to beatall of its small retailers. That’s great, but how is it competing againstthe giants like big bazaar and reliance retail? And this is what brings me to the third segmentof the episode and that is DMart’s competitive strategy against the giants. And this strategy could be described in justthree words careful, non fancy and ownership. Now Mr. Damani has been extremely carefulabout the expansion of the DMart stores and you will see that in spite of being in themarket for 19 years, they only have 220 stores, whereas big bazaar has 284 stores, relianceretail has more than 11,000 stores, and even more retail has 645 stores across India.
And the reason why DMart expands so slowlyis because they take the time to understand their customers, build operational efficiencies,and form a solid relationship with its suppliers. This is the reason why until 2020, DMart hadnever closed a single store since its inception in 2002. And when they did recently, they have donethat in order to use the store for their online win. Whereas if you look at its competitors, theyhave been on a seesaw ride opening and closing several stores across the country. Secondly, because DMart is very careful andusually certain about its profits, they follow.
The store ownership model, and this allowsthem to save a tonne of money on rental costs. Now although on the outside, it feels likebuying and constructing a store is way more costly as compared to renting it. The numbers actually tell a different story. If you look at the 2017 numbers, when futureretail was at its peak, you will see that future retail spent around 8% on rentals,hyper city spent 5%, reliance spent 3.4%. But if you look at DMart, they spent only0.2% of their total expenses on equivalent rent. Now this is some next level cost cutting.
And thirdly, these stores that you usuallysee they are not located in a fancy location. They’re mostly present in suburbs, in tiertwo and tier three cities where the cost of real estate is extremely low. And this is the reason why you will hardlysee or perhaps never see a DMart store in a fancy mall. And this cost cutting results into insanelevels of profits. Now, just to give you an idea of this in 2016,which is just before the ecommerce wave, when future retail had a revenue of 12,914 rupeesper square feet, reliance retail was at 13,901. But if you look at DMart, DMart was way aheadwith a revenue of 25,844 rupees per square.
Feet. And not just that, even in terms of profitability,while future stood at 252 rupees per square feet. reliance was at 213 rupees per square feet,but DMart was at 965 rupees per square feet. This is the insane difference that is createddue to the perfect combination of location, ownership and deep discounting. Ultimately, all these factors together turnDMart into a dominating force in the Indian retail space. Now this brings me to the most important partof the episode and that are the lessons from.
The case study and the important observationsthat you need to make before you invest into DMart or similar companies. Before we move on, I want to thank our partnerfor today’s episode and that is Cred. If you’re someone who does a lot of shoppingat places like DMart or online, using a credit card the right way can help you save a lotof money both in terms of reward points and building up your credit history. On top of that, if you use an app like Credto pay back your credit card bills, you can get credcoins equivalent to the bill amount. Now these cred coins can be used to get discountson various premium products on the cred app.
Via features like cred pay, the cred store,travel and other rewards. And if you download the app using the linkbelow, you are also eligible for up to 70% of discount on first and second of Octoberon products on the cred store. These are discounts on FMB products, electronics,grooming and other self care products. And you can redeem your cred coins to buyfrom brands like Sennheiser, noise, yoga bar and sneakers on the first and second of Octobervia the cred store feature. Also, if you’re an IPL fan, cred also hasa mega jackpot leaderboard wherein the person spending the most amount of cred coins onthe day stands a chance to win US stocks, BMW bikes, Bitcoin and more.
So if you love their idea download the Credfrom the link given in the description. Moving on to the lessons from the case study,there are two lessons and two observations that you need to make about DMart and similar companies. Number one, discounting is a superpower thatturned DMart into a legend. But while most of us think that Mr. Damaniwas able to do it only because he was rich, we miss out on the fact that this conceptof discounting came from the legend Sam Walton who was not even close to being a millionaire. So like Dhirubhai Ambani once said, ideas are nobody’s monopoly. So if you can’t do it alone, build a cooperative society, acquire capital and then do it.
But the one thing that you should never do is shying away from ideas just because they look difficult. Number two, the Indian middle class is the most underrated customer segment in the market. And while most businesses focus on selling to the cash rich audience, the disposable income of the middle class even today is a billion-dollar market that is just waiting to be tapped. Apart from that I wanted to make these two observations in the Indian retail space. I’ll attach both these links in the description.
So do check them out and study them intricately. Number one, if you compare the numbers ofthe retail players on ticker tape, you will see some insane difference in the expenses and the revenue. And look at this guys, the revenue of Avenuethat is the parent company of DMart is three times more than future retail. And yet, the operating cost of Avenue is 60%less as compared to future. Number two, draw comparison of two scenarios. Number one is before the ecommerce boom in2016 and after the acceleration of ecommerce in 2021.
For this, I’m going to attach a research report from HDFC which has an in depth analysis of the retail market in India and over here whatI want to highlight specifically is figure number 22 that you will find on page 10 if you see as compared to 2016, reliance retail grocery wing is catching up very quickly and it is almost equal to DMart today and this is because of reliance retail’s online presence while on the other side. If you look at the rest of the competition, they’re not even close. Now what remains to be seen is how is DMartready going to tackle the likes of big basket, reliance retail, and Groofers and both these documents are very good data points to actually start with to understand the retail space of India.
That’s all for today guys. If you learned something valuable from this post, please make sure to share it with your friends on social media. And for more such insightful business and political case studies, please subscribe to our newsletter. Thanks for giving your precious time to Reading our Blog.