Notes from D-Marts Red Herring Prospectus

1. On everyday low prices

2Point2 Notes: D-Mart has adopted retailing practices of several successful global retailers like Wal-
Mart, CostCo and Aldi. Everyday Low Price or EDLP pricing strategy was introduced by Sam Walton at
Wal-Mart. Both CostCo and Aldi also follow EDLP strategy. EDLP is the opposite of the High-Low pricing
strategy - High being the everyday price and Low is the price in sale periods.

EDLP results in lower advertising expenses as retailers do not need to promote individual sale events
or special discounts on specific products. EDLP also results in predictable consumer demand leading
to lesser stocking and supply chain problems. High-Low pricing requires continuous advertising of new
sale events and significant logistics issues due to large peaks and troughs in consumer demand. A well-
implemented EDLP strategy results in steady consumer demand, lower inventory and overhead costs,

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and lesser advertising spends. Cost savings from EDLP can be passed on to consumers to further
increase sales.

However, EDLP can also result in a perception of low quality which is avoided by High-Low pricing.
High-Low pricing also benefits from consumers psychological preference for sale shopping which
may lead to higher sales than EDLP strategy. Once a retailer has adopted a pricing strategy, it can be
quite difficult to change. JC Penneys attempts to shift to EDLP in 2012 led to a 40% drop in sales!!

2. On owning store real estate

2Point2 Notes: D-Marts store ownership model is significantly different from most other retailers in
India which operate on a rental model. For instance, Reliance Retails rental costs in FY16 were over
629 crs compared to 30 crs for D-Mart. Most retailers have preferred an asset-light model which gives
them flexibility to quickly shut non-performing stores and expand aggressively (Reliance Retail has
grown to over 13 million sft in retail area in 10 years compared to 3.3 million sft in 15 years by D-
Mart).

Owning stores is a normal practice among global retailers. Several of the retailers struggling due to e-
commerce are still valued highly due to their large real estate assets (eg. Sears, Macys). The likes of
Wal-Mart have even used their ability to drive large footfalls to lease out space to other businesses
including QSRs, other vertical-focused retailers, etc. The best example of a company leveraging its land
ownership to build a mega business is McDonalds. McDonalds today owns over 30 bn $s in land and
buildings and is among the worlds largest real estate companies. (ICYMI Do watch Michael Keatons
movie The Founder based on the McDonalds story which also shows the genesis of their real estate
ownership strategy)

Considering the importance of location for any retail business, having complete control on your
stores through ownership can be very useful. D-Mart through its sheer presence ends up increasing
the rentals of its store locations. With ownership, it does not have to worry about large rental
escalations every few years. Its peers on the other hand will see the rentals of successful stores

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escalate sharply resulting in a transfer of value from the retailer (despite it being responsible for the
value creation) to the store owner.

The scalability of this strategy though is difficult to ascertain. Will D-Mart find enough new properties
at attractive prices? Will the incremental ROCE of newer locations be much lower than the current
ROCE due to higher real estate prices?

3. On execution

2Point2 Notes: It took D-Mart 10 years to get to 55 stores and then another 5 years to double its store
count. In this period, D-Mart did not have to close even a single store due to non-performance. This is
a staggering achievement considering every retail business has loss-making stores due to bad location
choice or lower than projected demand or higher than expected competition. Absence of loss-making
stores may be entirely due to luck or evidence of an exceptional execution job.

E-commerce unicorns which start and shut new businesses every other day have a lot to learn from
D-Marts steady execution. D-Mart is proof that unicorn valuations can be achieved even in non-tech
brick and mortar businesses and without burning billions of $s in cash.

4. On competition from other brick & mortar retailers

2Point2 Notes: While competition has always existed in retail, it should only intensify going forward.
Many of the organized players will study D-Marts strategies and use their deep pockets to compete
with D-Mart.

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However, deep pockets alone may not be enough to pose a serious challenge to D-Mart. D-Marts
business has been built with dogged persistence and by strictly adhering to sound retailing principles.
Existing players cannot hope to compete with D-Mart merely by flipping a switch. It would require an
organization-wide change in culture which is easier said than done. As a wise man (Jageera in
Chinagate) once said, Humse ladne ki himmat toh juta loge par kaminapan kahaan se laoge.

5. On disruptive threats

2Point2 Notes: The biggest disruptive threat to D-Mart is the rise of e-commerce. E-commerce has led
to a wave of bankruptcies in the US market. Initially it was believed that the impact of e-commerce
will only be limited to some parts of consumer retail (such as books, electronics). However, over the
last few years we have seen e-commerce taking share from even apparel, footwear and grocery
retailers in the US market. No segment of consumer retail has remained untouched from e-commerce.
In 2016, Wal-Mart was forced to acquire Jet.com for US $3 bn to counter the threat posed by Amazon
and other e-tailers. Just yesterday, Instacart raised US$ 400 mn to deliver groceries on-demand.

India has also seen a rapid rise in e-commerce over the last few years. However, e-commerce growth
in India has been primarily driven by large VC funding and there are doubts about any of the e-
commerce companies having a viable/sustainable business model. But there is little doubt that e-
commerce is here to stay in India. The convenience offered by e-commerce is real and significant
compared to brick and mortar retail. Over the next few years, e-commerce should continue to gain
market share and directly impact brick and mortar retail. Whether, VC investors make any money in
the process is immaterial. Just as telecom has seen rapid growth in India despite investors losing

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money and with doubts about viability of telcos business model, e-commerce will probably continue
to grow irrespective of whether investors make money.

D-Mart seems to be taking the e-commerce threat lightly given its minority shareholding in the e-
commerce entity. The company has said that this is because the Board had issues with the cash burn
that any e-commerce venture will entail. This is extremely short-sighted as the Board is focussing on
the short-term losses while ignoring the long-term (5-10 years) potential for e-commerce to
completely disrupt its business model. Given its high fixed costs due to owning stores, D-Mart is the
most threatened by e-commerce. As such, it makes sense to allocate some capital to ensure it can
manage the shift to e-commerce from existing brick and mortar retail. Considering its minority
shareholding in the e-commerce venture, D-Mart will also not entirely benefit if e-commerce becomes
a major value-creating part of its business.

6. On relationships

2Point2 Notes: Many retail businesses in India are notorious for abusive treatment of suppliers.
Retailers use their scale to force suppliers to operate on wafer-thin margins and then excessively
stretch the payment periods. On the other hand, D-Marts suppliers are paid on time and treated
fairly. This has led to a strong relationship with suppliers and high loyalty. D-Mart seems to have
learned from how Aldi deals with suppliers. Aldis supplier policies (from -> http://ecr-all.org/files/is-
aldi-really-that-special.pdf)

1. No long-term agreements as a matter of principle

2. Fair partner Price once agreed not open to re-adjustments, no discounts demanded
afterwards, no unjustified complaints, payments on time
3. Vendors are not sucked dry

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