D-Mart, arguably India’s most successful low-cost retailer, may be looking at a multi-city e-commerce launch in coming days, after years of avoiding the sector citing the gruesome economics of online retail in India.
Avenue Supermarkets, or D-Mart as most people would know it, is known for its fanatic focus on keeping costs down and its financials well-grounded.
This approach has helped the company emerge as arguably India’s cheapest supplier of daily household goods, including merchandise such as apparel, vessels and small appliances.
However, the same cost-focused, zero-waste mentality has also kept the company away from the Indian e-commerce sector — known for companies that lose billions of dollars in a year on revenues that are often smaller than their losses.
Instead, D-Mart has largely focused on expanding its mega stores, which now number 214 across 12 states, about half of them in Maharashtra and Gujarat.
However, two factors have now prompted the company to reassess the e-commerce situation in India: mega investments made by two key players — Reliance Retail and Amazon — in areas that D-Mart operates in, and a shift in consumer behavior due to the COVID-19 pandemic.
Out of these, the first factor is arguably more important for D-Mart from a long-term perspective, while the second has provided an immediate trigger for the relook.
RISING COMPETITION
Reliance Retail — India’s biggest retail chain with nearly 12,000 outlets — launched its online daily-essentials shopping service across 3,500 PIN codes on May 25. JioMart offers practically everything you can get at a regular D-Mart store.
As if that was not enough, Mukesh Ambani’s mega plans in this area prodded Amazon, the world’s largest retailer and India’s biggest online retailer, to accelerate its plans in this area.
The American giant now delivers packaged food items across most Indian PIN codes. However, when it comes to fresh produce such as fruits, vegetables and dairy, its footprint is a fraction as that of JioMart.
COVID-19
The second reason is the impact that COVID-19 has had on D-Mart’s business model. D-Mart’s business model depends on sweating its assets and infrastructure to the maximum extent possible to keep costs low.
Every square foot of retail area at D-Mart super markets generates a whopping Rs 33,000 of sales per year. In other words, a single super market of 50,000 square foot generates sales of Rs 165 cr per year. This about two to three times the figure for most organized retailers in India.
However, this also means that D-Mart stores tend to be more crowded than those of its competitors. While this does not usually deter bargain-hungry consumers, crowds have got a bad name ever since Coronavirus turned up on the scene in March.
As a result, even two months after the lockdown was largely lifted in most cities, the composition of people who turn up at D-Mart stores is yet to normalize.
“Premiumization has got impacted, that much is true,” admitted CEO Neville Noronha, interacting with investors after detailing the company’s full-year and Q1 results earlier this month.
“What we are seeing is that..you have a larger section of the middle class or the lower middle class who are coming into the store, and the higher middle class’ contribution has come down relatively… in the economic strata, the higher you are, the more afraid you are, and the later you come into the store,” he said.
It’s not just the profile of the customers that is changing, but also the sections of the stores that they frequent.
Customers who turn up these days are more likely to buy their groceries and leave, instead of checking out the higher margin general goods such as footwear, clothes, vessels and small electrical appliances.
“We are not able to fathom what the reason is,” said Noronha. “Is it fear of spending too much time in the store? Or is it the pressure because of salary cuts and job losses? We are still unable to understand it. We are still trying to find out more.”
HOME DELIVERIES
To deal with the sudden dip in customer numbers during the lock-down, the company opened up D-Mart Ready — a sort of pilot home-ordering platform focused on the Mumbai market — to customers in all the towns and cities where it has its regular stores.
Unlike JioMart and Amazon, D-Mart Ready is the company’s low-cost take on the e-commerce model. While players like Amazon and JioMart price their items in such a way that they recover the cost of home deliveries, D-Mart leaves the choice to the customer.
“I tell the consumer: I am not gonna come to your home, can you just step out of your house, just a few paces? We’ll try and have pick-up points in as many places in the city as possible, may be, for every household, within 200-300 meters. She gets her delivery for free. This effectively means she gets D-Mart products at D-Mart brick and mortar prices, and that is what we’re trying to do with the e-commerce model,” Noronha pointed out.
“We are trying to tweak the D-Mart Ready model so that it is aligned to our DNA. That’s why we came up with this idea of a pick-up point. We believe that there is an opportunity for operating leverage kicking in, if the model works.”
While normally one would have expected most people to opt for home delivery, D-Mart Ready found that more deliveries are happening at the delivery center rather than at the doorsteps. “That’s the point. Value is eternal. People don’t like to pay extra,” Norohna pointed out.
So, when the lock-down came into effect, D-Mart simply opened up the platform to users beyond Mumbai.
Noronha admits the pandemic has had a drastic impact on how the company views the e-commerce sector.
“Pre-COVID also, we are relatively more positive than we were two years back about e-commerce. [With the] pandemic, all the numbers have changed — the demand, the costing, everything has gone,” he said. “..there’s a huge surge in e-commerce.
“Even in our e-commerce business in Bombay, we cannot manage the demand. A lot of you will have those complaints that there’s no delivery slot available. It’s a fact, because the demand is like 5x of our ability to supply,” he added.
The pandemic also saw an upgrade in the kind of items being sold via the Ready delivery network, indicating that more and more premium customers were now using the web-based home-ordering system.
Yet, as soon as the the strict restrictions were withdrawn and people started trickling back, D-Mart rolled back the Ready platform from non-Mumbai markets.
Noronha said it was simply not possible to cater to both channels — in-store buyers and online orders — using the supermarkets as fulfillment centers.
“The density of the revenue we do doesn’t allow us to do both from the same premises. When you see Wal-Mart or TESCO globally, there is an opportunity to utilize their assets better through e-commerce. D-Mart is doing very high-intensity sales per square foot. It is impossible for us, once we start hitting regular revenues, to also do e-commerce; our infrastructure is just not aligned for that. The moment the markets opened and the authorities allowed us to open our stores full-fledgedly, we decided that it’s better to focus on brick and mortar and withdraw e-commerce.”
LESSONS LEARNED
Yet, the experience — and the huge take-up seen for the online ordering platform — has given new impetus for the company to think more seriously about having an online platform across its markets.
“The whole idea of getting into D-Mart Ready was that, that some day, some opportunity may arise. Otherwise, as an organization, if you go 7-8 years back, it was not appropriate even talking about e-commerce within our company, and yet we got into that business,” Noronha pointed out.
“E-commerce in our kind of business, grocery e-commerce, the opportunity is there only in large towns. We hold that position, and we will have our strategy around that. We will expand the grocery business in large towns, for e-commerce, wherever we see an opportunity.”
Asked if the ‘Ready’ service is being prepped for a multi-city launch, Noronha said he cannot comment right now “because we are working on something”.
Despite the changed conditions, D-Mart does not believe in entering the e-commerce segment and sustaining losses year after year to build up a brand, possibly because it already has a brand that resonates with value. Instead, the company will focus on those cities where it already has an offline presence to leverage its supply chains.
“It’s not like, just because of COVID, all hell is breaking loose and we have to accelerate and do it 1500 cities. We are NOT going to do that…
“Our view is, [the opportunity] is not going anywhere. Build your brand, build what you stand for, [something] which is very unique. As and when you are ready with your model and you get it to the customer, the customer will come to you. Even if someone else does this faster than us, we don’t want to get into that game. We want to be in the game being better than anybody else, rather than being faster than anybody else.”
He’s also quick to add that it’s not a sour grapes kind of situation either. “We are not speaking about our pessimism around e-commerce because of an inability to build e-commerce. The fact that we expanded in 200 cities within one month from scratch indicates that we can do it. We don’t want to do it for some other reasons..including [the fact that] brick-and-mortar running from the same stores is not the best way to do it.
“When e-commerce is the preferred channel for shoppers — and shoppers are changing — we will also do it. We are again saying that as of today, the opportunity is in large towns only for a model like that.”
Norohna also added that Avenue Supermarkets is not interested in the ‘platform business’.
Competitor Reliance Retail, for example, is building its JioMart on a hybrid inventory-cum-marketplace model, where the website will show products from both Reliance Retail as well as other offline shops near the user.
“That is a business we don’t want to get into. This is pure grocery e-commerce,” he pointed out.
GETTING THE MODEL RIGHT
Norohna said the reason why Avenue Supermarkets has not launched Ready services in all the towns is because it’s still finalizing the operating model.
In any e-commerce operation, there are two sets of costs, he pointed out, “the head-office and the tech costs as well operational costs.”
Even if the operation does not recover the head-office and platform costs, it should at least be able to recover the cost of operating the delivery network, he pointed out.
As of now, he said, he is yet to achieve that. Ready is still a loss making operation, despite having 220 delivery points in Mumbai and sales increasing to 2.5 times in one year.
“The energy that goes into breaking even at the operating level itself is humongous. But once you achieve that, you have to look at how do you apportion the head office costs over the entire business.
“E-commerce is a very long story..we are trying to ensure that we shrink this whole path as short as possible…
“This is the incubation period of D-Mart Ready. Unless I get the model right, I can’t give you numbers. If the model is right, the opportunity is huge. But we have to first fix the model.”
He said it is important for Ready to break even at the operational level at least, before expansion. “Unless we see a reasonable visibility there, we didn’t want to expand. D-Mart Ready, the way we want it done, and the basic DNA and culture of the organization, tends to go a bit slow on this.
“But now, because of the pandemic, the revenues are significantly higher than what they used to be earlier. So we will see,” he said. “It’s definitely better than what it used to be earlier. It’s very encouraging.”