Avenue Supermart: a compounding machine?

Let’s understand implications of Dmart operating on low margin –

Before Dmart started operating –

Most of the retail trade is done through multiple layers of retail channel.

Considering the case of typical bedsheet manufacturer abc ltd –

1. Abc Ltd will purchase grey cloth (raw cloth in simple terms) from erode / Ichalkaranji / similar hubs

2. Abc Ltd will create multiple designs and specifications. They will give these specifications to printers (people who actually own the factory and do the dirty work)

3. Printers will then supply printed bedsheet to abc Ltd. Abc Ltd will do quality checking and then package these bedsheet in attractive format. The process of branding and printing of mrp is done at this stage.

4. Assuming abc Ltd makes roughly 10000 bedsheet every month under 10 different brand names.

5. Abc Ltd will now contact various distributors spread all over India and try to sell them this finished products. They need to offer credit to these distributors so that they can make bulk purchase. So normally they keep margin of 15% – 20%.

6. Normally a big state like Maharashtra has 2 / 3 distributor while a small state like kerla has only one.
   Distributor then sells these bedsheet at mark-up of 20-30% to various wholesaler. (a typical wholesaler caters couple of districts). Distributor offers wholesaler margin of 2 month.

7. Now wholesalers sell these bessheet to retailer for mark-up of another 20-25%. They also offer credit to retailer for upto 3 months.

8. Retailer sell these bessheet to customer with mark-up of 40-60%. This is necessary because it has to service every individual customer and product might take 6 months to finish.

So now if you calculate, from start to end, difference between manufacturer price and retail price becomes very big.

Eg. Manufacturer sell bedsheet for Rs 100 to distributors.

Distribuor will charge 25% and sell it to wholesaler.
Now price becomes Rs 125.

Wholesaler add his 25% over this price and sells it to retailer.
Now price becomes Rs 125 + 125*25% = Rs 156

Now retailer add his margin of 40% and put final price to the product as – Rs 220 (Rs 218)

Difference between manufacturer and end customer price becomes more than double.

Dmart tries to reduce this gap and charges only 15-20%.

So customer get huge benefit.

That’s why I belive customers are willing to ignore –

1. Congested stores
2. Narrow shopping lanes
3. Parking issues
4. Stores located outside city market
5. No service
6. No customer shopping experience
7. Etc etc etc

As long as this difference remain prominent, Dmart or any retailer working with low margin and direct buying will continue to gain market share.