Over the decades, we have come across different kinds of businesses. Every industrial revolution has given us new economics of doing business like the manufacturing sector, the Internet boom, and many more. With this evolution of business models from time to time, we have come across some broad B2B (Business to Business) and B2C (Business to Customer) business models.
Retail business is one among many others, which have gained popularity in the consumer industry. It is a business where consumer goods and services are sold via large distribution channels to earn profits.
Where some old players are enjoying their large market share and huge returns due to an early movers advantage and their scalability, some new ones like DMart have made an excellent debut in the industry with their unique business models, giving a fierce competition to the existing players.
A Brief History of ‘DMart’
'DMart' is a supermarket chain across India owned by 'Avenue Supermarkets.' None other than 'Radhakishan Damani,' one of India's famous value investors founded the company in the year 2000. Mr. Damani's journey from a successful value investor to the founder of DMart has been an inspiration.
Read: The Success Story of Radhakishan Damani
DMart started its journey from 2 stores in the state of Maharashtra and has 176 stores across 12 states in India by FY20. 'Avenue Supermarts,' the owner company of DMart supermarkets, was a privately held company till 2016.
In the year 2017, the company came up with an IPO of Rs.1,870 Cr., which was opened with a bang. The company's shares were listed at almost a 114% premium, which reflects the positive sentiment for the company among the investors. The company got listed at the price of Rs. 632 and the CMP (Current Market Price) stand at Rs. 2544, implying that the shares of the company have given a compounded growth of almost 60% over three years.
RK Damani being an investor himself very well understands the market and its players, which gives him an added advantage for running the company in parallel with maintaining a positive and healthy sentiment among the investors towards the company, like maintaining a healthy ROE (Return on Equity), adopting a strategically strong business model, etc. In FY20, the company has a market capitalization of Rs. 1.5 Lakh Cr.
DMart's Business Model
A successful business model is the crucial element of any business to flourish, grow and beat its competition. DMart's business model has made the company grow exponentially and become the most profitable supermarket chain in India. The company's mission is to be the low-priced retailer in its area of operation.
Characteristics of DMart's Business Model
The company comprises everyday use products for its customers, which are categorized as Foods, Non-foods and General Merchandise & Apparel. The chain operates on a B2C (Business to Consumer) model, where goods are directly sold from the manufacturer to the end-user.
The demand for these goods is on-going as they comply with the basic day-to-day needs, thereby creating a demand throughout the year. This eliminates the risk of high demand fluctuations and provides consistency to the business.
Revenue Drivers (DMart's Revenue Model)
It is a payment that is made by the manufacturer of goods to the superstore to keep its products on the shelf for sale. Also called an entry fee for the products, which are held in the supermarket. Being a supermarket chain DMart also charges a 'Slotting Fee.'
The store attracts high volumes of customers, making it an attractive and opportunistic place for the manufacturers to keep their products. This attracts more and more manufacturers willing to put their products in the store.
A slotting fee indirectly reduces the product's purchasing price for the retailer, thereby allowing it to offer the products at discounted prices, i.e., less than the MRP (Maximum Retail Price), hence attracting large buyers.
A low-cost business model with high profits is one of the most attractive and successful forms of running a business. As simple, it sounds like it is not that easy to achieve.
However, DMart has successfully achieved it. How? DMart operates on a low-interior-cost concept where it has tried to reduce the operational expenses for the company. These low operating expenses are a result of- efficient space utilization by putting more products in less space thereby creating space for more products; less number of billing counters reduces the requirement of more workforce and systems thereby reducing employee cost; a very basic and low-maintenance interior of the store, are some of the ways through which DMart has controlled its expenses.
Low Purchase Price for the Products
The credit cycle of DMart, i.e., the time in which it returns the payment to the manufacturers for the goods purchased from them is quite less than other retail operators. This allows the company to avail massive cash discounts from the manufacturers, thereby cutting the purchase price of the goods.
Being a low-priced retailer gives an edge to DMart. Low price leads to high footfall in the store leading to high sales volume, thereby attracting more and more manufacturers to keep their products in DMart. This is a cycle created by DMart, which keeps the loop ongoing. Further, due to high volume sales, manufacturers also extend a volume discount, reducing the purchasing price. This supports the low-cost business model and makes it stronger.
India being a diverse country has various regional specific goods. DMart grabbed this opportunity by stocking its stores with area-specific products. People across different states have unique lifestyles habits and hence lead to slightly different consumption habits.
DMart pooled the popular local brands of a particular region in one place, making it more convenient for the buyers to avoid going to the local Kirana shops. This helps DMart to cut the competition from general Kirana stores gaining more market share.
The Company operates on self-owned stores, which allows it to be a low or no debt company making it stronger financially. Further, no rental cost helps in high positive cash flows, which are used for opening more stores. Although the expansion and growth in self-owned stores are slow, it has its own advantages. Of all the existing stores to date, almost 80% are self-owned.
DMart’s target customers are low-income groups who are looking for low-cost goods. Thus by providing excellent quality and branded products at a lower cost, DMart attracts a more extensive customer base than other retailers.
Operating on a B2C model eliminates intermediaries and hence the added cost to the product's price. This further helps the company to sell goods at a lower price.
Advantage of Consumers Behavioural Patterns
Offering a variety of products at low-prices creates psychology in customers to buy more, which is offered at a discount. This behavioral pattern among the consumers has been evident when the 'Sales Period' of the year arrives in stores.
Food For Thought!
DMart currently operates the majority of its business via brick and mortar stores. But the entry of online e-tailers has started to disrupt the market share of existing brick and mortar stores. These e-tailers are highly cost-efficient and are more widely accepted due to a simple concept of shopping at the tip of their fingers.
Avenue Supermarts have launched 'Avenue E-Commerce Ltd.,' its online shopping portal, to keep up with the competition and the industry. But competing in this space calls for its challenges and new players like 'Amazon,' which is a giant whale in itself. So whether DMart will be able to keep up with the changing market scenario or not is food for thought.