For DMart, Weak Consumer Spending Is Not The Only Worry

Avenue Supermarts reported its slowest revenue growth on a four-year compound annual growth rate basis in the quarter ended June. The company's other operational metrics, including gross margin and profitability have remained below pre-Covid levels for an extended period. And the retailer added only three stores during the period, bringing the total count to 327. DMart Ready, the online business that was rolled out six years ago, has yet to turn profitable.

Share price of the retailer that had a blockbuster debut in 2017 has remained relatively stagnant over the past two years. Analysts tracked by Bloomberg predicted a potential 20% decline over the next 12 months.

The country's most valued retailer, however, has offered limited insight. Neville Noronha, chief executive officer and managing director of Avenue Supermarts, in a statement attributed the persistent weakness to lower sales in general merchandise and apparel categories. And he cited continuing impact of inflationary pressures on discretionary consumption.

That's partly true. Inflation has prompted consumers to cut back spending and the rural economy hasn't still recovered. But for DMart, that does not alone explain slowing growth.

The hypermarket chain said its product mix is improving and trending towards pre-pandemic levels, but the June quarter performance showed no signs of that. While DMart didn't explicitly say so, analysts expect the pressure on sales to continue throughout the fiscal. Some are even considering it a structural trend.

The "stress" witnessed during the June quarter in DMart's apparel segment, which accounts for about 12% of its overall revenue, was "not a surprise", according to analysts at ICICI Securities. Growth is likely to moderate for most retailers. Earlier than usual end-of-season sales and increased discounts point towards unsold inventory, primarily because of inflationary pressures.

But slowdown in DMart's apparel segment is largely a result of higher competition. To stimulate growth, analysts said, the retailer might need to consider restructuring its business.

DMart faces off with mass market peers including Reliance Trends, Trent-owned Zudio and Landmark Group's value brand Max Fashion. According to ICICI Securities, this competition primarily stems from rapid expansion of these low-cost apparel retailers. Zudio and Max have set up over 400 stores combined in four years through March as compared with DMart's 148.

"A majority of these store additions have occurred in regions where DMart holds a significant market share," ICICI Securities said. In the five cities of Mumbai, Hyderabad, Bengaluru, Pune, and Ahmedabad, accounting for 41% of DMart's retail presence, Zudio operates 43% of its stores, while Max has 23%.

In the Mumbai Metropolitan Region, where DMart opened its first store in 2002, the Radhakishan Damani-owned retailer has 40, or 13%, of its total outlets, according to the brokerage. Zudio has 34 stores and Max operates 16 in India's financial capital.

Zudio has been the most aggressive in store expansion, opening 300 outlets in the last four years versus Max Fashion's 100.

"The average selling price of apparel for DMart is similar to Zudio, while slightly expensive (but still relevant) for Max Fashion in all key segments (men, women, kids)," according to recent channel checks by ICICI Securities.

Analysts at the brokerage said that since apparel is an aspirational category, customers seek superior brand perception, bold designs, increased variety, and an elegant shopping experience. That includes better trial rooms, superior display of merchandise and hassle-free after-sales service.

"In our view, Zudio and Max rank higher on all these aspects compared to DMart," the brokerage said.

Amnish Aggarwal, consumer sector analyst at Prabhudas Lilladher, said in a note that while general merchandise is fast catching up towards pre-Covid levels, apparel lags. "We believe aggressive pricing and store expansions of Zudio and Reliance Trends is diverting customers away from Supermarts to apparel-centric stores."

"DMart needs to restructure its apparel business given new threat perception, which will take a few quarters for turnaround," it said. The brokerage expects DMart's margin to decline in FY24 before it starts recovering in FY25.

Abneesh Roy, a senior consumer sector analyst at Nuvama Institutional Equities, also cited competition from online retailers as another key risk.

Numbers reflect DMart's worries.

• In FY23, the share of gross merchandise and apparel segments fell to 23% from the pre-pandemic level of 27% in FY20.

• Gross margin stands at 14.6%, down 120 basis points over the previous year. DMart's pre-Covid Q1 average gross margin was 15.7%.

The food business has limited potential to improve margin. That makes it even more important to revitalise the high-margin apparel and general merchandise segments.

From FY12 to FY20, DMart consistently maintained same-store-sales growth above 15%. This performance was driven by pent-up demand, closure of Big Bazaar stores, and high inflation.

Most analysts have retained their long-term bullish outlook on DMart. According to Motilal Oswal, its superior cost control than competitors has been a crucial factor in its previous successes.

"DMart has managed to protect its Ebitda margin at pre-Covid levels, through its strong cost-control measures, unlike most retailers who have taken a margin hit in the range of 200-650 basis points," the brokerage said. "The healthy cost efficiencies and recovery in demand could drive its growth in the future."

And it's Radhakishan Damani's model of owning self-management that sets DMart apart from peers. DMart owns its buildings or operates on lease periods exceeding 30 years. That allows it to minimise costs and optimise per unit economics.

In a note, Nuvama's Abneesh Roy highlighted that the retailer also adopts a cluster-based approach when opening stores, considering adjacencies and emphasising an efficient supply chain. That enables DMart to target densely populated residential areas primarily inhabited by lower-middle, middle, and aspiring upper-middle class consumers, he said in the note.

"DMart’s distribution and packing centres form the backbone of its supply chain that supports its retail store network."

Avenue Supermarts, valued at Rs 2.41 lakh crore, is four times bigger than its closest competitor Tata Group's Trent, the parent company of Zudio, which has a market capitalisation of Rs 60,230 crore.

And it's been aggressive in store additions. It threw open 50 new outlets in FY22, twice as much as it opened between FY17 and FY19. Analysts expect 40-50 new hypermarkets this year, with the company accelerating the addition in the second half.

Jefferies said a key catalyst for DMart will be increased store density within current clusters which will unlock operating leverage.

Avenue Supermarts has yet to respond to BQ Prime's queries. But in an interview with Bloomberg last year, Noronha said DMart plans to expand its store count nearly fivefold to 1,500.

There’s "no need to worry" about the competition, he had said.