by Suhani Adilabadkar

It was a 6% plunge for the stock after June quarter results were released by Avenue Supermarts last week. While analysts were expecting the revenue and profit declines in their estimates, investors had been hoping for a softer landing for the biggest Indian retailer in organized retail.

Dmart, the supermarket chain operated by Avenue Supermarts has 216 stores with a retail business area of 8 million sq. ft. spread across the western, southern and northern parts of India. The company offers a range of products, foods, non-foods (FMCG), general merchandise and apparel product categories housed in its standalone stores, and offers a cost conscious alternative to players in its peer group.

Hit by the Covid-19 pandemic and consequent localized lockdowns, DMart is currently battling kirana shops and ecommerce giants alike. The launch of JioMart has added to worries for the supermarket player.

Quick Takes

• A 6% plunge in share price followed the June quarter results released by Avenue Supermarts last week.

• PAT declined 88% YoY and revenue took a 33% YoY hit in first quarter of FY21.

• DMart witnessed a 45% drop in revenues in April as more than half of its stores remained closed or operated for extremely restricted hours.

• The virus fear factor has limited travel and pushed customers towards neighbourhood kirana stores and e-grocers

• Commenting on the quarter results, Mr. Neville Noronha, CEO and MD, Avenue Supermarts, said, “Wherever stores were allowed to operate unhindered, we recovered 80% or more of pre-Covid sales in most stores.

• JioMart, the online grocery platform is to be integrated with Whatsapp and local kirana shops in the near future, and is likely to unsettle the leaders in the supermarket industry. 

June Quarter FY21 was a Washout

It was a monsoon washout for DMart with PAT declining 88% YoY and revenue taking a 33% YoY hit in first quarter of FY21. Impacted by nationwide lockdown and restricted store operations, revenue came out at Rs. 3,883 crore in Q1 FY21 compared to Rs. 5,815 crore same period last year.

Operating profit declined 81% YoY and was reported at Rs. 112 crore in the June quarter FY21 against Rs. 597 crore corresponding quarter previous year. Operating margin stood at 2.88 % in Q1 FY21 compared to 10.3% the same period last year, impacted by the absence of high margin non-essential categories in the June quarter product mix. PAT or net profit stood at Rs. 40 crore in the June quarter FY21 against Rs. 323 crore in Q1 FY20.

Commenting on the quarter results, Mr. Neville Noronha, CEO and MD, Avenue Supermarts, said, “Wherever stores were allowed to operate unhindered, we recovered 80% or more of pre-Covid sales in most stores. Discretionary consumption continues to be under pressure, especially in the non-fmcg categories. This is impacting gross margins negatively. Store operations and duration of operation per day continues to remain inconsistent across cities due to strict lockdowns enforced by local authorities from time to time.”.

DMart- Challenging Times Ahead

Traditional retail accounts for about 85-90% of the total retail pie, organized retail, 12% and ecommerce about 4-6%. Rising income levels, lifestyle changes, increasing affluent middle class and rapid digitalisation is driving organized retail. DMart was conceptualized by veteran billionaire stock market investor Mr. Radhakishan Damani in the year 2000, starting with a single store in Maharashtra.

Catering to the ultimate prerequisite of the Indian middle class - keeping the family grocery bill within budget - DMart has been a value multiplier since its listing in 2017.

Following its EDLP (every day lower prices) policy and offering low-priced products at significant discounts, DMart is one of the most valuable retailers in the world right now on the stock market.  Coming to the current pandemic situation, analysts raised their ‘Sell’ placards for DMart signalling overvaluation, slower growth for brick & motor entities, changing consumer preferences and continuation of stringent localized lockdowns implemented by various state authorities. The March quarter FY20 management commentary had already cautioned investors of painful precarious times ahead and consequently the June quarter came out as a disappointment with net profit almost evaporating and revenues falling off the cliff. 

DMart witnessed a 45% drop in revenues in the month of April as more than half of its stores remained closed for operations or operated for extremely restricted hours. May saw improvement in store openings and supply chain issues being resolved and though overall lockdown rules softened in general, localized lockdowns continue with the same or even more severe intensity in various cities. With this backdrop, footfalls in DMart stores have declined and the virus fear factor has pushed customers towards neighbourhood kirana stores and e-grocers. On top of that social distancing norms have further truncated customer reach and high margin non-essential category being dis-allowed by authorities have shrunk margins.

High fixed costs, special allowances to employees, rising sanitation costs and lower manpower availability has hit DMart stores. Speaking on Covid-19 implications, Mr. Noronha said, “While we are in the midst of the second wave of the pandemic and business outlook may continue to seem uncertain, we are less anxious than we were in the beginning of April 2020”. 

E-Grocers = Amazon + Flipkart + Grofers + Bigbasket and now, JioMart

Instead of donning masks, braving traffic congestions, parking restrictions and going through thermal check-ups, customers prefer booking their grocery list through e-grocers or even their local kirana store ready for a home delivery in present tiring times. Food products and other household categories are delivered by online players at discounted rates making it tough for brick & motor players like Star Bazaar, Spencers, Big Bazaar and DMart.

Though Amazon and Flipkart were already heating up the online retail segment, entry of Reliance Industries has raised competition across the entire retail value chain. From FMCG companies to warehouse players to kirana shops, everyone is watching for what lies ahead. Of course, retail is completely different from telecom and a large number of players can co-exist, but JioMart will definitely disrupt functioning of the retail industry and change customer preferences in the long run. 

JioMart, the ecommerce platform of RIL, already functioning in 200 cities, currently serviced by Reliance Fresh and Reliance Smart is integrated with Whattsapp and local kirana shops. JioMart is definitely not the first player with this amazing retail strategy, Amazon has been do this with its ‘I Have Space’ programme.

So even though there was always competition, JioMart’s scale and competitive intensity are significant. And the money is also pouring in - Walmart’s $1.2 bn investment in subsidiary Flipkart (mainly for building up online grocery platform), Amazon committing $ 1 bn to Indian retail landscape and for Jio platform, street is still digesting Google investment news. 

Of course, consumers will be the ultimate winners, but the question remains - will resilient players like DMart be able to re-strategize themselves? Just being less anxious will not help. Investors are certainly worried, and DMart stock is trading at its 3-month low.