Points to Ponder for Quick Comm Startups from Dmart’s FY22 results
One of India’s largest retailers, Dmart has swung back with strong growth in the April-May-June (AMJ-2023) quarter, growing 70% over the last covid-free AMJ quarter back in 2019.
I thought it might be interesting to look at some of the unique drivers of Dmart’s growth and profitability and what the key takeaways might be for quick commerce start-ups in emerging markets.
Source of Margins Needs to be Thought Through
Dmart runs a “Everyday low price” model and has gross margins of ~15%.
While Dmart sells 3 categories of products: Foods, Non-Foods and General Merchandise, what is interesting is that more than half of Dmart’s margin comes from selling general merchandise (i.e., plastics, toys, games, crockery, garments, footwear).
Maintaining competitive pricing is critical for quick commerce players as well in emerging markets. As the Dmart margin profile shows, the ability to drive margins by selling just food and non-food categories is quite limited. Quick commerce players need to think about additional revenue streams. Copying Dmart’s general merchandise strategy is largely not possible for the following reasons: (i) days of inventory for this category tend to be higher, which quick commerce dark stores might not be able to accommodate; and (ii) as a category these are fairly competitive, with the horizontal e-commerce players (Amazon, Flipkart, Shopee, Lazada etc.) owning the assortment and pricing play. Given this, quick commerce start-ups should be actively looking at more other potentially margin additive categories such as fruits & vegetables, cosmetics etc.
Aside from category plays, other opportunities for margin expansion that uniquely exist for online players are: (i) monetisation opportunities with brands; and (ii) data-based strategies such as segmentation of customers to show differing prices/discounts and delivery fees.
Consistency of Service Brings down Marketing Spends
Dmart focuses on delivering “Everyday Low Price”. By focussing on this offering that attracts mass-market consumers in India and building consistency in this offering, Dmart has been able to establish a brand for itself, which consumers associate with a certain value proposition. All Dmart stores look and feel a certain way: the staple items are in huge bins, the pricing and discounts are clearly visible and the best-priced items are stacked in a way that convey their deal-based nature.
What this focus and consistency means is that they spend very little on marketing. Of course, for an offline store their retail footprint serves as marketing. However, Modern Retail stores need consumers from outside of the core catchment area to shop as well to meet top line expectations. This is where Dmart’s offering serves it well in attracting consumers and retaining them once they’ve had their first Dmart experience.
From a quick commerce perspective, what this translates to is a focus on tailoring of the service at a store-level. Service for a quick commerce player is not just time taken for delivery. It is also price and assortment. Borrowing from CRED founder Kunal Shah’s “Delta 4” theory, the question all quick commerce start-ups should answer at a dark-store-level is if their pricing + assortment + service time is consistently better, by a delta of 4, to an existing player in that area i.e., do customers who have ordered rate the quick commerce service an 8, versus the existing alternatives anywhere below a 4. If this isn’t the case, the service-level needs to be reconsidered.
Once you have the “Delta 4” offering, building consistency in service is what helps keep CAC and marketing spends low. This is absolutely critical given the razor thin margins in the grocery space.
Expansion needs a Revenue Per Sq. Ft lens
Among the many cost-side metrics Dmart reports to establish its Low Cost operating model is: Revenue Per Retail Sq. Ft, which helps understand the sales it generates per sq. ft. of area of its retail stores. For FY-22, this number was at INR 27,454 (~350 USD).
Using this as benchmark, from an efficiency standpoint, assuming an AOV of INR 600 (~7.5 USD), a dark store should be consistently doing ~380 orders a day to derive similar cost efficiencies. If the AOV is lower, the number of orders as a target will go up and vice-versa.
For quick commerce companies there is a learning here from an expansion standpoint. Instead of trying to cover as much ground as possible, before setting up a dark store, quick commerce start-ups would do well to understand if an area is capable at all of generating this volume of orders given: (i) # of households; (ii) purchasing power (which will determine AOV); and (iii) purchase frequency.
These are some of my learnings after having spent the last few years tracking Dmart closely and investing in Quick Commerce start-ups in emerging markets. Do feel free to reach out to me if you think there’s more to uncover and other learnings that I might have missed.
