The Business Model of DMart

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

Product-Mix
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)
Slotting Fees
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.
Reduce Expenses
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.
Volume Sales
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.
Regional Goods
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.
Self-Owned Stores
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.
Target Audience
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.
Eliminates Middlemen
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.
 Walmart strategy- Everyday Low Pricing Model

We see a lot of supermarket chains around us. Big Bazaar, D-Mart, V-Mart are some
names that have gone huge and later released their IPO. Supermarket chains have
expanded from metro cities to now smaller towns. One thing that unequivocally
attracts people to the Supermarkets stores is their low pricing. They buy and sell in
huge volumes and thus can generate economies of scale that normal Kirana Stores
cannot. This piece talks about how Wal-Mart’s famous revenue model works and has
the retail sector been able to generate benefits for consumers through this model.
The Pricing
There are two kinds of pricing models broadly known in the retail business. One is
the High-Low pricing model (also known as the H-Lo model). Supermarkets sell
goods at a higher price, and then they call for a ‘Sale’. Customers get a promotional
discount and they rush to the stores.
Another model is the Everyday Low Pricing (EDLP) model. Instead of selling some
object for ₹100 in a normal season and ₹50 during ‘Sale’, a supermarket may
choose to sell it at ₹80 throughout the year. Now, is this model profitable? Does it
attract enough customers? We will dig a little deep.
The Customer Base
There are two kinds of customers. First are those who do prior research on their
grocery. They know what they want to buy, where the price would be the least, other
promotions and so on. These people take the most benefit of the ‘Sale’. These
people stock when the prices are low. These are the people to whom even grocery
shopping excites.
Second, are those who do not take their groceries seriously. Except for a few things,
they do not even plan what they should buy. They just reach out to the store and
take the stuff. This crowd is the customer base of the EDLP supermarkets.
Everybody wants to pay less. However, they are ready to pay ₹80 for something that
regularly fluctuates between ₹100 and ₹50 as long they have their peace of mind.
The customer gets associated with the supermarket brand thinking they will not have
to pay foolishly higher than the fair price. Therefore, they shop from a single chain
with whom they have developed trust.
The Supermarket Profits
The High-Low pricing supermarkets make profits when goods are in demand and
then sell them in the discount when demand falls flat. EDLP supermarkets are selling
the same goods at lower prices throughout the year. How do they profit then? This is
what Wal-Mart has taught the world. EDLP has proved to reduce fixed costs
significantly. Less amount is spent on promotions or marketing. Instead, the focus is
on the improving quality of service. Since these kinds of customers have a long-term
association with the supermarket, a minimum cash inflow sustains irrespective of
market factors. Besides, this association helps the stores to predict the demand and
manage the inventory accordingly. The efforts are minimal and hence, they need
minimum staffing for this purpose.
Also, they need not rethink the price repeatedly. Price changing is a cumbersome
process. With every change in price, all the variables change. Each change has to
be well quoted across the store. EDLP is devoid of such processes. Supermarkets
like Wal-Mart are known to build over these advantages. They indeed sell at lower
prices and hence their margin is lower. Yet, the volumes of sales have compensated
the loss of margin.
The Customer Advantage
The EDLP model has been famous amongst those who are not into shopping. They
just want to buy things at a fair price. Hence, the customers develop a sense of trust
with the brand. In India too, people have a clear choice when they go for buying.
They know the set of products they would get and an estimated price they will have
to pay. They need not screen every store, Monday to Saturday, to know when their
product would be charged the least.
Since such customers shop less, they tend to buy most of their groceries at once.
Hence, it reflects significantly in their bill. Their bills are mostly predictable. It can be
easily understood that if High-Low pricing does not offer many variations, people
would prefer to move to EDLP. So, do the customers benefit from the EDLP? Well, it
is a trade-off. It would take more effort to reduce the bill if you are into buying stuff
from ‘Sale’. On the other hand, you put less effort; you get an assured price that is
somewhere in between the ‘High-Low’ price.
The Indian Market
Indian market is much divided when we discuss EDLP as a profitable and customer
attracting strategy. Big Bazaar advocates the ‘High-Low’ strategy. It has ‘Sabse
Sasta Budhwaar’ (Cheapest Wednesdays) offers. It is India’s biggest supermarket
chain. Big Bazaar is part of the ‘Future Retail’ owned by Future Group. Future Retail
has shown a consistent rise in the past 5 years with current annual revenue nearing
$3 billion. Similarly, DMart keeps coming up with promotional offers on different
products at different times.
On the other hand, we have Reliance Retail. Reliance Retail is an umbrella of
various Reliance brands including Reliance Fresh, Reliance Smart, Reliance Digital,
Ajio, and recently acquired Hamleys. Reliance Retail since its foundation in 2006 has
chosen to use the EDLP pricing model. In its 14th year, it is generating $10 billion in
revenue every year.
Each retail company has chosen its way to price, and it seems like each works in a
way or the other. It is even more surprising because the Indian market is known to
be more price-sensitive, and the one that is stereotyped to get lured by the
promotional offers or ‘Sale’.
The Verdict
Is EDLP the best way to do business? No!
Not many retail chains have been able to switch to EDLP in the past. As pointed out
above, EDLP is designed for a different customer base. Though this customer base
is increasing, High-Low pricing is still very much in the game. There is a huge
customer base that cherry-picks promotional offers and then tends to buy stuff. With
much information now available online, this customer base is more informed.
Moreover, the EDLP model needs to build a relationship with the customers over the
years. The trust of pricing, the familiarity with products, and the approval for quality
takes time to build.
On one side, EDLP stores have a loyal customer base. On the other side, it
becomes tough for them to bring in new customers without offering any promotions.
In fact, for markets like India, promotional offers have a proven record. Nonetheless,
with people spending less time on grocery shopping, which is likely to reduce more
in this busy world, the EDLP model stands tall. Wal-Mart and Reliance Retail have
proved this. With time, we might see some other chains taking up this model. Until
then, to each its own.