Road less travelled
DMart’s e-commerce tortoise
squares off against the JioMart
hare
The Mumbai-based retailer’s online venture, DMart Ready, doubled sales to over $100
million in FY21 while keeping losses in check. But, unlike its deep-pocketed and
spendthrift rivals, it is determined not to sacrifice profits at the altar of growth
e-commerce tortoise squares off against the JioMart hare
Seetharaman G 16 Aug 2021
,
Thanks to a rising gross margin and The pandemic notwithstanding, the DMart Ready has been pushing But it has to make a strong case for
falling expenses, DMart Ready turned e-grocer is taking a measured pickups from its 325 kiosks over pickups at a time of ever faster
Ebitda-positive in the quarter ended approach to expansion even as peers delivery, and unlike peers, charges deliveries
June 2021 JioMart and BigBasket step on the for delivery regardless of order value
gas
Avenue Supermarts’ call with analysts on 22 July to discuss its results for
the quarter ended June made for interesting listening.
Ignatius Navil Noronha, chief executive of the company—which operates
the DMart chain of supermarkets—fielded around 90 questions on the
three-hour call. Of those, almost 40 were to do with its online grocery
business.
This was both odd and expected at once.
Odd since the business—DMart Ready—contributed just over 3% to
DMart’s consolidated revenue of Rs 24,140 crore ($3.3 billion) in the year
ended March 2021. And expected because DMart Ready, helped by the
pandemic, more than doubled its revenue for the year to ~Rs 790 crore
($106 million). More impressively, despite this surge in sales, losses
remained flat—at ~Rs 80 crore ($11 million).
DMart Ready’s good run continued in the quarter ended June, with its
Ebitda turning positive.
Launched in Mumbai in 2017, DMart Ready allows customers to place
orders online and pick them up from its network of kiosks, free of charge.
Alternatively, it also delivers to homes for a fee that ranges between Rs 49
($0.7) and Rs 79 ($1.1) per order.
DMart Ready is not cut from the same cloth as its big-spending peers such
as BigBasket —now majority-owned by the Tata Group—Reliance
Industries’ JioMart , Amazon, SoftBank-backed Grofers, and Walmart-
owned Flipkart. It is the only online grocer to stay away from free delivery
regardless of the order value. And till recently, it also stood out among the
pack by offering pickups. Amazon is now reportedly running a pilot in
Bengaluru, allowing customers to pick up their orders from the More
supermarket chain, which it co-owns.
DMart, founded by savvy equity investor Radhakishan Damani in 2002, is
known for its penny-pinching ways and unwavering focus on its bottom
line. This has helped it become India’s second-largest supermarket chain
by revenue, after Reliance Retail , and rack up a market capitalisation of
Rs 2,32,800 crore ($31 billion).
“Amazon, Flipkart, and Reliance can do whatever they want. But this
won’t get Damani and Noronha to think differently,” says an analyst with
a domestic brokerage. She and several others The Ken spoke to for this
story requested anonymity since they are not authorised to speak to the
media.
DMart has consciously charted a different path from its peers by owning
the land on which most of its stores stand, instead of leasing it; limiting its
range to top-selling brands; and offering consistently low prices instead of
hosting frequent sales.
It’s now sticking to its contrarian approach in e-commerce too.
“The model has to be replicable,” Noronha said on the July earnings call.
“Even if it takes time in a manner we don’t lose money, it’s okay.” As of
June, there were 325 DMart Ready kiosks across Mumbai, Pune,
Bengaluru, Hyderabad, Ahmedabad, and Vadodara, according to an
estimate by PhillipCapital, a brokerage. (DMart Ready’s official store
count as of March was 290.)
But as DMart Ready expands its presence in these places and ventures
into new cities, it will have to make a strong case for pickups. DMart may
be hoping that the shopper who braves the narrow aisles and crowded
checkout counters at its outlets just because she is getting the most bang
for her buck won’t mind going to a DMart Ready kiosk instead.
Disquiet over delivery
“There is instant grocery delivery; there is the marketplace model. We
don’t understand all this,” said Noronha on the analyst call. “We know
grocery retail and we know the DMart customer.”
So, the prism through which DMart sees e-commerce is different from
what its competitors are doing. Instead, it’s what the retailer has learnt
through its 234 DMart stores in nearly 100 cities.
DMart knows that in a low-margin business like groceries, one has to run
a very tight ship. Great value for customers cannot come at the cost of
profits. That’s why DMart still does not have a store in central or south
Mumbai, where real estate is pricey. The chain even owns 85-90% of its
stores.
Its decision to focus on a few top-selling brands in every category results
in better use of store space and ensures DMart isn’t saddled with
inventory. That, in turn, results in better management of its working
capital, which allows DMart to provide consistent discounts.
So, it’s hardly a surprise that DMart is not one for free deliveries. In fact,
even with a delivery fee, the first three orders have to have a minimum
order value of Rs 500 ($6.7), with this threshold doubling for subsequent
orders. Contrast that with JioMart, which doesn’t have a delivery charge
or minimum order size. BigBasket, on the other hand, does free delivery
for orders above Rs 1,200 ($16). Below that, the delivery fee is capped at
Rs 50 ($0.7).
The initial idea behind DMart Ready was to have a store within a one-
kilometre radius of shoppers in Mumbai, says a BigBasket executive.
“They set up the first 100 stores very quickly. But the response wasn’t
great.” Questions sent to DMart went unanswered.
DMart has managed to set up DMart Ready outlets in areas of Mumbai
where it doesn’t have stores. That’s because an average DMart Ready
kiosk is just about 250 sq ft in size, compared to 38,500 sq ft for a DMart
supermarket.
A DMart Ready store in Mumbai (left) and the online grocer's app nudging users
towards pickups
In Mumbai, even though DMart delivers to most pincodes through DMart
Ready, the latter’s app pitches pickups as a better option than delivery.
When The Ken tried to place an order in central Mumbai, pickup slots at
nearby DMart Ready outlet were available for two days later, while
delivery would take yet another day.
A supermarket chain offering pickups in addition to delivery is not
particularly novel. Since 2013, Walmart has offered customers in the US
the option of placing an order online and driving to a Walmart store to
collect it without having to leave their car. As of January 2020, Walmart
offered this service at 3,200 of its stores. Even its rivals Target and
Amazon-owned Whole Foods have expanded their pickup services.
Closer to home, Amazon has reportedly started rolling out pickups from
More supermarkets, which it acquired with private equity firm Samara
Capital in 2018, in Bengaluru.
But offering pickups from its stores is not an option for DMart given that
they are in busy neighbourhoods and parking is often a problem. Hence
its decision to rent standalone spaces for DMart Ready. And deliveries are
done from fulfilment centres. DMart Ready has five of those in Mumbai,
including two DMart stores that were converted last year to cater to
growing demand online.
Finding locations for DMart Ready may be a lot easier than doing the
same for DMart. But the company doesn’t want to get ahead of itself.
Profits trump pace
“This is not a company that will make a big splash [in e-grocery] without
getting its unit economics right,” says the analyst with a domestic
brokerage quoted earlier.
DMart may have taken DMart Ready to cities like Pune, Bengaluru, and
Ahmedabad over the past year. But these are experiments whose fate will
depend on how DMart Ready fares not just in those cities but also in the
Mumbai Metropolitan Region, which accounts for roughly 90% of the 325
DMart Ready kiosks as of June.
“Ifyou don’t have the money of Amazon or Reliance, you milk cash flows
from one catchment before moving on to another,” says a second analyst
with a domestic brokerage. As The Ken recently reported , Reliance has
already spent Rs 7,000 crore ($943 million) on JioMart’s grocery business
alone, which is just 15 months old but is in over 200 cities. By contrast,
DMart has so far invested a measly Rs 370 crore ($50 million) in DMart
Ready, according to DMart’s annual report for the year ended March
2021.
But DMart may be getting closer to an online model that it can deploy at
scale, if DMart Ready’s numbers are any indication. In the year ended
March 2021, even as its revenue more than doubled, its losses were
unchanged. DMart managed to pull this off partly by paring its employee
and other expenses significantly.
When The Ken visited a DMart Ready outlet in a residential building in
central Mumbai, we found stacks of multi-coloured crates containing
orders yet to be collected. But there were also dairy products sold over the
counter. There were three other customers, one of whom had come just to
buy milk.
The store was manned by just one person. But, according to a company
executive, a DMart Ready kiosk typically has two personnel. It services
around 25 orders every day and has an average order value of Rs
1,600-1,650 (~$22). It’s seldom idle, except maybe for a brief lunchtime
lull.
DMart Ready’s gross margin of 13% in the year ended March 2021 was
not considerably lower than DMart’s 14.4%. But the former’s employee
expenses relative to revenue—at 4.5%—were more than twice as high as
DMart’s. DMart takes care of delivery itself instead of outsourcing it to a
third party.
By doubling its current revenue, DMart Ready could break even, says the
first analyst mentioned earlier.
According to the investment bank Goldman Sachs, DMart Ready could see
its revenue cross Rs 5,000 crore ($674 million) in the year ending March
2024. From there, it could surge nearly 7X to Rs 34,600 crore ($4.7
billion) by the year ending March 2029—that’s 20% of DMart’s
consolidated revenue, up from 3% today.
DMart can afford to take it slow on the online front, says Madhur Singhal,
managing director of Praxis Global Alliance, a consultancy. “Their core
business is not under pressure.” Supermarkets still account for just 3-4%
of the overall grocery retail market. And the e-grocery business is
expected to surge from $3.5 billion in 2020 to $22.4 billion in 2025,
according to PGA Labs, a unit of Praxis.
Even so, DMart Ready’s measured approach is not without its
shortcomings.
Cost of convenience
DMart Ready offers brands which are not available at DMart
supermarkets. Davidoff coffee is a case in point. It costs ~Rs 500 ($6.7)
per 100 gm—over 80% pricier than the more massy Nescafe. But at
3,000-3,500 SKUs, DMart Ready still only has a tenth of the range that
BigBasket offers.
Offering only the top brands across every product category is not a
problem as long as your prices are the lowest. “ There is no first-mover
advantage,” says the second analyst mentioned above. “As long as you
offer the best value, people will shift. “
But that’s not the case with DMart Ready. A recent price comparison by
the brokerage Motilal Oswal between different online grocers found that
JioMart is the cheapest, followed by DMart Ready, Amazon Pantry, and
Grofers.
Even BigBasket, which is at the top end of this cohort, is becoming more
value-conscious. “Earlier, our promotions were about how we had the
widest range and the freshest products.,” says the BigBasket executive.
“Now, it’s about price. You can’t take a company from $1 billion (in
revenue) to $10 billion on the back of premium customers.”
But DMart is restricted by the kinds of cities it can take DMart Ready to.
So far, DMart Ready has only been launched in cities in western and
southern India where DMart has been present for years. DMart only has
two stores in the National Capital Region and none in the eastern city of
Kolkata, which means it could be quite some time before DMart Ready is
rolled out in these cities.
And there are questions over the appeal of pickups when its competitors’
focus is on ever faster delivery. “Convenience can’t be halfway,” says a
BigBasket executive. “Customers don’t even want to come to the lobby to
collect their order. They want it delivered to their doorstep.”
But DMart is aware of the price it has to pay to go the extra mile.
“Obsession on customer satisfaction is at the cost of losing a lot of
money,” said Noronha on the earnings call mentioned earlier. “We want
to ensure losses are within reasonable limits. That’s our culture.”
DMart may have a scalable business model in DMart Ready, says the first
analyst quoted earlier. “But it will take them a very long time to scale.”
DMart may be a debt-free company, but it doesn’t have the resources or
willingness of Reliance to go on a spending spree.
Different approaches in online grocery—from using a fulfilment centre to
make deliveries to relying on neighbourhood stores to do the same—are
still playing out. DMart is counting on finding a large enough market for
its hybrid model.
But the question it needs to answer definitively is whether, in the long
run, the economics of the business necessitate being among the top three
players. And that, as things stand now, is a luxury that comes with deep
pockets.
