Big Bazaar vs DMart: Why one Failed and Another Succeeded?
Future Group launched its first Big Bazaar store in Hyderabad in 2001; While its rival in the brick-and-mortar space, Avenue Supermarts launched its first DMart store in Powai, Mumbai in 2002. Both the players entered the Indian retail market around the same time.
While the focus of Big Bazaar was fashion, food and general merchandise; D Mart’s focus was on grocery and general merchandise but not exclusively on fashion.
Fast forward to 2011 (~10 years after the launch of first store)
Big Bazaar grew to 250 stores, while DMart’s number of stores were just a mere 10. Analysts at that time had written off unlisted DMart as a marginal player in the Indian offline retail space.
Fast forward to 2022
The market capitalization of DMart is INR 2.3 trillion with 300+ stores across India while Future Group lost the plot due to excessive debt and had to sell to Reliance.
How did this Happen?
Success and failure between two similar companies in the same market comes down to the difference in business models. So let’s discuss the finer aspects of business models of both these retail giants.
Real Estate: DMart have always followed the philosophy of store-ownership model. They purchase or lease land on the outskirts of cities and build its stores there. DMart has spent over Rs. 23 billion on acquiring land and buildings but either owns most of its stores or has them on a 30-year long-term lease. On the other hand, Big Bazaar have always rented the stores which are located in big malls.
This way DMart saves a lot on rent costs. A recent ‘Yes Securities’ analyst note points out that DMart’s rental costs are only 0.2% of total sales compared to 8% for Big Bazaar.
Assortment: DMart’s sales mix is largely limited to food and groceries. They stay away from categories like fashion, high-end electronics, and other accessories.
At Big Bazaar stores you would find fruits and vegetables as well but DMart doesn’t deal in perishables. It focuses on products with higher shelf life. DMart deals in clear cut no-frills groceries and claims to provide the most discounted price. Whereas in Big Bazaar, you would surely spot more ‘frills’ in the form of perishables, fast food, FBB clothes and accessories etc.
Pricing: As a result of the kind of assortment being sold in DMart store, customers understand that they are getting a no-frills approach which results into most food items and groceries on offer will be 6% to 12% cheaper than what they will find at other stores. In some cases, certain products will be 10% below MRP.
Big Bazaar invested in the store environment while DMart had stores with basic air conditioning. The huge cost savings enabled DMart to reach out to its customers in the form of ‘Everyday Low Pricing’ (EDLP) scheme.
Expansion Strategy: Future Group (Big Bazaar) used its capital to expand a working capital intensive store network across the country, as well as to pay additional attention to marketing expenses to grow its customers.
DMart, on the other hand, used its capital to buy assets that set a strong momentum for future expansion, in contrast to the whole concept of the asset light model.
While Big Bazaar head to India’s rapidly-growing malls because that’s where consumer spending is highest, DMart hasn’t and doesn’t ever plan on opening a store in a mall.
As other retailers are experimenting with a wide range of formats and geographic locations, DMart sticks to what it knows best. It uses one of two formats of stores whose size is calculated based on location and shopper density.
Also, DMart is extremely reluctant to expand geographically. Until 2014, it had stores only in four Indian states. They follows a principle of opening 75% of its new stores in existing states or markets and plans on staying true to this in the coming years.
DMart has built their business on “three-step business model”, similar to that of Walmart. Start with low-cost products that consumers need on a daily basis and that you can sell for slightly below MRP. This allows you to rack up a great inventory turnover ratio. Then use that quick inventory turnover to negotiate better prices with wholesalers which in turn allows you to support your low prices. DMart has created a moat by paying its suppliers early. The company pays its suppliers quickly and thereby claims more discounts. These discounts are passed on to customers and hence they buy more. The inventory replenishment is quite efficient because of this recurring process. And, of course Big Bazaar is missing this.
DMart has always thrived on low cost and high volume. To enable the same, its stores are shelved with most popular products from the perspective of its target customer’s monthly purchase basket. And by giving heavy discounts on these popular products, DMart has been able to sell high volume at a small margin, thus maintaining a great inventory turnover ratio, compared to Big Bazaar.
DMart stores are more like a well-tuned assembly chain: where products are converted into sales as fast as possible. Because of this, it’s able to avoid the high-stakes, perennial discount game that other retailers often get trapped in.
Lessons Learnt and the Road Ahead
DMart’s stringent focus on profitability offers lessons to both physical and online retailers, both of which have stumbled in the last few years. After burning through billions in venture capital funding and thousands of layoffs, India’s e-commerce industry is finally growing up and shifting towards a focus on profitability. On similar lines, traditional brick-and-mortar retailers, which have burnt their hands in expanding too quickly and experimenting too rapidly, are slowly taking a reality check.
Working capital is an important lever for margins for retail industry. A 15–20 day volatility in working capital can boost margins exponentially. Working capital is the oxygen for the company. Apart from high debt at Future Group, one reason was the sharp decrease in working capital.
