Voice of the Head – Uphold our thesis; new levers scaling well
We met Gunender Kapur, Investor CEO – Vishal Mega Mart (VMM), to assess the progress on our thesis around sustenance of double-digit SSG, 2.5x expansion opportunity, and retention of best-in-class RoIC (~40%) for VMM. The management granted confidence on sustained double-digit SSG on annual basis, aided by its differentiated private label strategy, GST reduction, and healthy initial traction in the Q-Com business; albeit Q3 may see some volatility due to festive/seasonal shift, in line with the post-Q2 commentary. Penetration potential is robust, with strong traction across states in the underpenetrated South and West. Further, initial trend for smaller-format stores is encouraging, with revenue throughput/RoIC emerging similar to the company average, aided by a strategic play on the product/pricing mix for such stores. VMM is also investing back its scale-led sourcing/cost savings, to provide best-in-class fashion/relevance to consumers, which is driving customer loyalty for its retail format. Despite growth investing, VMM foresees gradual margin gains, aided by HO cost leverage and savings from new automated warehouse. Also, VMM is mulling over RFID implementation in its Apparel category, which has potential to improve inventory control and reduce volume/value shrinkage at stores.
Q-Com bringing in new consumers; unit metrics show healthy trend
Q-Com is emerging as a strong incremental channel and is driving the onboarding of young, time-constrained consumers to the franchise (~20% of overall QC customers). The channel grants convenience for bulky FMCG purchases, for which physical stores are less optimal; consequently, ~70% of Q-Com sales come from FMCG, with relatively lower contribution for apparel/general merchandise categories. Notably, consumer preference on Q-Com channel skews toward VMM’s private labels, especially higher-value and premium SKUs. Q-Com contribution is currently at 1.5-9.0% across stores, depending on implementation vintage and maturity of the Q-Com industry in such catchment areas – the upper end is already exceeding management’s initial expectation of ~5% in Q- Com. The channel is near cash-breakeven, helped by AOV of ~Rs700 in mature stores, gross margin of 23–24%, and incremental delivery cost of only Rs30-40/order. With healthy traction, Q-Com capabilities have now been rolled out across ~460 cities.
Both facets of expansion (South/Smaller format) seeing healthy initial traction
VMM is seeing healthy trends across the underpenetrated South India, supported by strong traction in the high-margin apparel category. VMM has rightsized Karnataka’s historically oversize stores (25,000sqft) to the company average store size (17,500sqft), leading to improved throughputs. Expansion momentum is also strong in the South, with current presence and future potential higher than initial expectations. Alongside this, VMM has piloted a new small-store format to penetrate deeper into Tier2+ cities, and throughputs/return ratios are trending broadly in line with the larger format, aided by its strategic play on the product/pricing mix for such stores. VMM plans to scale up the format to 40–50 stores over the next year, and to freeze the model before pursuing an accelerated expansion for this format. As of now, the expansion of large-format stores remains the priority for the company.
