In today’s Finshots, we explain how DMart has tweaked its strategy over the past year and we make a suggestion of our own.

The Story

“DMart’s business model is like America’s Costco.”

That’s what Raamdeo Agrawal, the Chairman of the financial services firm Motilal Oswal, said a few months ago.

For the uninitiated, Costco is an American supermarket chain that sells all kinds of products — grocery, food, apparel — at really low prices to its members. And that’s exactly what DMart does in India too.

For context, because it sells at low prices, it has a relatively low gross profit as a percentage of sales too. As per a report by CLSA, DMart converts only 14.5% of its sales into gross profits. Because Costco has a similar strategy, it’s even lower at 10.5%. For context, Walmart is much higher at 23.5%.

But we’ve got a suggestion to make DMart even more like Costco — DMart should sell gold!

We know it sounds crazy, but hear us out.

See, DMart’s shares have been in a bit of a funk of late. And by ‘of late’, we mean since 1st January 2022. For 2 years, the stock went nowhere. Costco was in a similar boat too. But about 6 months ago, the fortunes began to turn. Costco’s shares started to zoom upward.

It happened just when Costco began to sell gold.

Now we know that correlation is not causation, but analysts are pretty upbeat about Costco’s new business venture.

So, maybe it’s something DMart should consider too, no?

Not sure?

Okay, let’s give you some context about DMart’s business and recent struggles first. Maybe that’ll change your mind.

DMart’s low-price strategy begins with real estate ownership. It snaps up land in areas where it’s cheaper or when prices fall due to a bad economy. Like what happened during Covid. Sure, it’s an upfront cost that dilutes near-term profitability — the return on equity (ROE) drops from 25% to 17% when you include the land costs — but it gives DMart freedom from negotiating rents and flexibility with expansion. It can start off with a smaller store and then expand it by adding more floors once it sees demand.

Anyway, once it does this, the next part is sourcing inventory at a lower price than peers.

Think about it this way. DMart doesn’t stock as many different products as other supermarkets. It knows exactly what it wants and orders those limited items in bulk. That itself gives it some negotiating power.

Then, it starts to sell groceries and daily-use items like soaps to consumers at bargain prices. Because if there’s one thing that all Indians love, it’s a discount to the MRP! And that gets people to flock to DMart for their grocery fix. Higher footfall in stores translates into higher sales — it has grown the topline by nearly 29% annually over the past decade. And that, in turn, helps the company to turn over its inventory quickly and even pay the suppliers faster.

Suppliers are happy. They’ll be incentivised to sell products to DMart for even better prices. And DMart then passes on the discount to customers to deliver on its promise of “Everyday Low Prices”.

To sum up, DMart benefits from a virtuous circle with low costs driving low prices driving sales velocity, leading to buying power, driving costs down further.

Investors loved the stock. It zoomed 600% within 6 years of its IPO. Even Covid couldn’t stop it.

But then, 2022 rolled around and things took a turn. Analysts started pointing out that quick commerce players — such as Blinkit, Swiggy Instamart, and Zepto — were offering products at almost the same price as DMart. Even DMart’s low-priced apparel business began to see more competition from explosive expansion by Tata’s Zudio.

So DMart had to do something.

And as per CLSA, DMart has been expanding its private label goods slowly and steadily over the past year. Think of this as DMart getting in touch with a random manufacturer, asking them to make a detergent powder, and then slapping its own label across it. It’s a DMart product.

It’s not a route that DMart has opted for in the past. Possibly because it didn’t want to rub any of the big brands the wrong way. But that’s history now. DMart products are being displayed prominently in its stores as well as website.

And since DMart brands are being offered at an even greater discount than big names, it could hammer home its ‘value’ tag and draw more customers.

But DMart doesn’t really advertise its brands. It picks up only low-cost ads at train stations, bus stops, or regional papers. That means it has to rely on word-of-mouth.

So, how can it create a viral moment that will draw even more eyeballs to its stores?

Well, maybe it could take a leaf out of Costco’s book and start selling gold.

Apparently, Costco has seen tremendous success selling gold bars. It’s raking in $100-$200 million a month these days. And as per Wells Fargo, “the addition of gold/silver is a smart move for Costco, as it only reinforces its value position.”

Yup, people are worried about inflation and are flocking to gold. And by offering gold at little to no markup, Costco is giving them exactly what they want. The bars are selling out within hours. And jewellery has now become a top-performing category for Costco.

Sure, the current sales figures are just a drop in the Costco revenue bucket, but as analysts point out, it’s still a new source of revenue that didn’t exist before. Something is better than nothing.

Also, think of the free publicity for Costco. Every media house in America is talking about it. And that alone might be enough to sell more memberships and get more people to walk into their stores. The higher footfall could translate into higher sales in other categories too.

Now imagine DMart starts selling gold and silver coins too. Indians already have a penchant for these metals. They buy it as an investment and for all sorts of festivals. And with the trust and brand name that DMart has built, they won’t need to be convinced of the quality of metal either.

People might flock to buy the bars and coins. And maybe DMart will see its private brands get more eyeballs too. Maybe its fortunes will change.

Possible? What do you think?

Until then…

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PS: DMart’s shares have risen by 15% this year and just managed to creep up over its level on 31st December 2021.