Avenue Supermart: a compounding machine?

Annual Concall Summary

Business Updates

• Most of the challenge around recovery of the general merchandise and apparel segment are now over and it is seeing a recovery
• Broad principle on expansion remains around the earlier stated strategy of opening more stores in existing clusters
• The strategy around ecommerce business is to not grow very fast before improving the existing business model
• 41 new stores were opened and policy will be to maintain either equal to or more number of stores than opened this year

Participants

Nuvama

Goldman Sachs

Macquarie

JP Morgan

Jefferies

Morgan Stanley

CLSA

Kotak

HSBC

Kotak Mutual Fund

Fidelity

IIFL

Prabhudas Liladhar

Nomura

ICICI Securities

Avendus SPARK

Centrum Broking

Birla Mutual Fund

PGIM Mutual Fund

QnA

• The trend in general merchandise and apparel both have seen an upward trend and in the last two quarters apparel has seen the highest growth among all internal categories
• There were leadership issues in the apparel side which have been corrected and trend points in the upwards direction
• Quite confident of expanding the ecommerce business with the model pointed towards getting higher revenues from larger metros
• Not entering into quick commerce and will take own route in this segment and quite confident of growing well
• The company has the capacity to deliver on annual store openings of 40-50 with enough inventory on hand and in another 2 years the idea is to work towards annual store openings of 60-70 a year but this will happen in a lumpy fashion
• The idea is to have a 15% annual enhancement on store openings to the cumulative stores opened till date
• In brick n mortar stores there is still no case to sell fresh produce profitably until the roadside vendors exist
• The focus is on building larger stores because as GDP per capita picks up and the propensity to spend increases would want to be ready for that
• As a retailer there is a choice that comes with better bargaining power which is either better value to customer or higher gross margins and the management continues to use it appropriately
• Private labels come in play when the per capita inches above $7000 per capita and branded companies in India are very competitive and with good quality so it is very tough to work around this and the whole private label play will take a lot of time to grow big
• The entire thinking is around how the company will look like post 10 years from now and what quality of talent will be required to run the company at that size
• The range of store openings for the next three years is around 40-60 stores and the only challenge to that is unpredictability of regulatory challenges
• Today in ecommerce business 86% of the deliveries happen between 24 hours and 45% happen within 12 hours. The rest are by customers who pre decide a late date of delivery
• The broad ethos is to work in a fashion which becomes easy for everyone to notice but difficult for anyone to follow
• The home delivery model is a better model and the numbers prove it and in large towns home delivery seems to be the way to go and whatever it takes to build fulfillment centers in large towns is what the company will do so that delivery can happen within 12 hours to the customer
• There is a clear segmentation in terms of convenience model tilting towards home delivery and value model shifting towards larger stores and thus pickup points are somewhere in the middle and not really solving a problem which is why many pickup points are now being shut down
• In last five years the store cohort in towns with less than 5 lakh population has gone up from 21% to now at 29%
• Not just food inflation but even wage inflation in the lower strata of society has also been huge
• Even in the digital business the company will keep the proposition of value intact which is what the parent company stands for
• From an opportunity standpoint the general merchandise category is larger than the apparel category
• The real driver of growth rate is accelerated store expansion
• The core business model of the company has such a long growth runway that if the focus is diverted towards other monetizing aspects it will dilute the focus on the core business which in itself has a very large growth runway
• The number one priority is customer pull and D2C brands which have grown to a little scale and now grow to a much larger company as per customer preference come to DMART
• If we take a 3-5 year period land prices have gone up in many of the small towns and cities
• Around 232 locations of DMART Ready have been shut down over the last 12 months
• In terms of cost of operation DMART ecommerce model is far better than quick commerce which operate relatively at a higher cost while in terms of gross margins quick commerce companies have a better margin than DMART ecommerce because they operate primarily on convenience
• The average basket value of the shoppers went up post covid and that has maintained at the same trend since then and the whole idea of the purchasing team is to catch trends and be relevant for the shopper on an ongoing basis
• 95% of the apparel that the company sells is private label and not branded products per se
• The ecommerce business now has its operating model in place especially from a cost perspective and there is no restriction to the team on the growth path but now the pace of growth depends upon capability and execution per se
• The belief maintains to be that value segment will be a larger segment than convenience and hence would like to remain within the space of value in both digital and brick and mortar space
• Distribution centers are not built while entering a newer state and once store reaches critical mass in a new state distribution centers are opened
• The ability to sell non FMCG products in ecommerce model is not as easy as in the offline stores and thus it is the assortment which will drive the margins in ecommerce
• The core focus areas for the management continue to be on footfalls, basket value, conversions and overall LFL growth rates
• The biggest challenge of scale is how the business will be managed and hence focus is on building up capabilities and thus perception of brand should not diminish to customers, vendors and even employees
• The earlier thought was that whether a Minimax store could be merged with a pickup point which could be a better omni channel play and this still remains a work in progress for now and the operating metrics in this segment are better than pure play ecommerce business. However it is still not in a phase where it can be scaled up to 5000-10000 stores
• Not contemplating getting into wholesale offline retail