DMart’s future lies in network expansion and FMCG focus, says Jignanshu Gor

“I think that consumption demand if it improves in a weaker demand environment plus, of course, with the competition from quick commerce that they have faced, they are maintaining very solid footfalls and very solid same store sales growth,” says Jignanshu Gor, Bernstein India.Let us start with DMart. The general view is that DMart has got their mojo back. Just when that was becoming like a consensus view, stock went from 3600 to 4100, 4200. The numbers have come out over the weekend and they have poured cold water on all the optimism. Where is DMart headed and do you think the worst is behind DMart?Jignanshu Gor: So, I agree on growth perspective DMart shows a lot of positives, on margin perspective the print and the commentary was not as positive as you would expect from many others as we have seen from other players as well. But DMart is known for being very factual and straightforward in their commentary. So, I would not read too much into what their explanation is, that is more about the past than talking about the future. Where DMart is headed is I do agree and I have been of the view that the growth mojo for them is back primarily because they have been struggling with technology under the weaker consumer demand which all the FMCG players have been talking about and DMart’s 80% business is exactly similar to FMCG.

So, I think that consumption demand if it improves in a weaker demand environment plus, of course, with the competition from quick commerce that they have faced, they are maintaining very solid footfalls and very solid same store sales growth.

So, I think that plus they are accelerating on network expansion as very clearly mentioned in the commentary as well.

So, growth bodes really well for them. I am of the view that today that is cyclical. The cycle might last for another year or so, but they will get their margins profile back as well. So, I am positive on the DMart getting back its growth profile at the PAT level as well.Why will they get it back? Because apparel which is the main business for a value retailer like DMart that is where Trent is eating the lunch, dinner, breakfast and even evening snack.Jignanshu Gor: So, I would contest that the target customer for DMart and Trent for apparel does not necessarily is the same. The price points are also quite different. Having said that let us focus on DMart itself. They have gotten back to a close to 15% gross margin which has been their guidance forever.

14.8% for FY24 14.8% for FY25 without apparel as a category coming back or general merchandise and apparel together being hovering around the 22% to 23%.

They have been able to do this because they have launched private labels and improved the focus on private label quality. They have added a lot more D2C brands in their stores which allow them to negotiate better trade terms.

And from our channel checks, they are increasingly doing better at apparel. They have realised their positioning is basic home wear apparel and as long as footfalls are there, they will be able to cross sell eventually.

So, I think you do not need the apparel number to go back to 10%. If it does, it is great. It is tough given the competitive environment. I do not expect that to happen.

The question is can they get back to a 15-15.1% gross margin and there are other levers available for them as long as apparel does not deteriorate any further and the intense competition between DMart and especially Zudio or other value players is there, it has been doing well in spite of that competition. Where their fixed cost helps is operating leverage. So, with slightly better improving demand that is the real bet for either FMCG play or a DMart play. In a way, DMart is an FMCG play with network led growth possible where they can grow stores, whereas for many FMCG companies, they have sort of penetrated a lot more than DMart has.

So, for a big box retailer, you really need operational leverage to get margins and if your SSSG keeps improving, their margins will automatically follow.

That is about the numbers, but was not the problem with Avenue always about the competitive intensity from the Q Comm players? How do they beat that? And how do you think eventually they are going to address that? By beating them to their game or joining that party?Jignanshu Gor: So, this thesis has been oscillating in the last six months. When their Q2 numbers came, the thesis was that their growth is killed completely and DMart also reacted in their press release a bit too negatively.

What we feel and what our research tells us is while there is an overlap between a typical DMart customer and a current quick commerce customer, the overlap is being overestimated on both sides.

There is a reason why we think that when it comes to pure FMCG or grocery items, a big box retailer is able to provide value which quick commerce will find it difficult to do on a sustainable basis, that is my view.

I think DMart can and will compete better on offering value to customers and offering choice to customers, so that overlap should get over and they will be able to survive or thrive in quick commerce because I do not think the entire grocery retailing in India is going to shift online and if it does not shift online, then DMart is one of the two large big box retailers left and arguably given margin profile, etc, the better run retailer as well.

Will they join them? I do not think so. I think they will significantly improve the DMart ready game. They have been working at it for the last nine months, but I do not think they should even plan to join it, but they will definitely reduce the delivery times and increase the assortment and so on so forth and I think greater investment that we see on DMart in this year or DMart ready in this year is a sort of a measure of that.