On store expansion, in the last call you had mentioned you have invested in people in expansion side and processes which will increase your capacity. Do you see that happen in FY25? Or it will take more time before you can step up from approximately 40 stores you've been adding for the last couple of years? What are the other bottlenecks?
I don't have a very clear, concise answer in numbers. We are primed and ready in terms of opening around 40-50 stores. We have that kind of inventory to at least commit saying 40-45, we will do, every year. If you were to look at our store opening trend, in another two to three years, this 40 should go to a 60 or a 70 per year. We are working like that. But it will be very lumpy. Typically 10% to 15% of my number count should be my new store opening, broadly. That's the North Star.
On gross margin profile over the medium-term. The mix is going to probably be stable with general merchandise and apparel. On FMCG and food side - your terms of trade with leading suppliers, premiumization of FMCG and food portfolio, private label contribution. How do these key things behave and do they imply potential for gross margin improvement?
On terms of trade and branded FMCG - this is all work in progress. The more revenue you deliver and the more contribution you deliver from a business standpoint to a FMCG company, your bargaining power improves. Your improvement in bargaining power means more gross margins or better value to consumers. That's the choice. On private labels, it's a very, very long journey. India is still a USD 2,500-3,000 per capita income country. Private labels play out beautifully when at least the country is at USD 7,000-8,000 per capita income. Branded companies are very competitive. We want products to be significantly cheaper than a branded company product at significantly large discount. Whatever we do today, 14%-15% gross margin, we're going to play around that. Anything beyond that, we want to pass it on to the customer. We are more a top line-driven company - if we continue to remain relevant to the customer from a value standpoint then margins, ROI, all of that will follow.
Since H2 last year, we are seeing a smart recovery in GMA portfolio. You said we will maintain the current levels of 23% and not go back to 27%, 28%. How should we understand this from going forward perspective, where will these improvements get reflected in the Company's P&L?
We've been towering between 14% and 15%, or 14% and 15.5%, and that's where it's going to be. Whether it's GMA or whatever, the way we look at it is what is the blended average gross margin going to be. I really cannot predict beyond a point. 14.5%, 15%, 15.5%, those are the kind of ranges we play in from a gross margin standpoint. You have to look at a blended gross margin.
GMA is coming back, shares are maintained at 23%. Will it get reflected in top line growth then? How should we capture it?
I can't give you any projections on what our growth rates are going to be, number of stores we're going to add, what our gross margin is going to be. I can't give that. It's not that I have information I'm not sharing, but I can't crystal ball and give you a finite number. I'll give you colour. I'll give you qualitative understanding of where we are trending.
On private brands - you have DMart Premia products which I can sort of get from sales of Align Retail (5%-6% of sales). Then branded products you are launching - about 130. And general merchandise which you pack. Can you give a rough sense of contribution of each?
We don't disclose those numbers. I'll give you a direction about how to look at this. You will get a sense of how well we are doing in private labels, simply basis the PKD. If the product is lying on shelf for too long, that means the category is not doing well. Make a call basis that.
What could change that this EBITDA margin starts to move in a positive direction?
I don't have a point of view. We simply feel very delighted and excited that we've reached here in such a short period of time. With the kind of EBITDA losses you mentioned, I think it's promising. You have to give these things time. The best part is, you have a brick-and-mortar business delivering great profits and is able to fund. With such low losses, the larger business can afford to give it more time to make it profitable.
Without seeking guidance, do you feel confident that revenue growth should accelerate in FY25? We saw 18-odd percent in first four quarters on average. Do you see better in FY25?
I would say the other way around. I would be a little conservative on the guidance. It is getting more and more challenging to maintain a 15% to 20% CAGR growth rate if I continue to grow at only 40 stores per annum. The real driver of CAGR growth rate is accelerated store additions. We don't look at, oh, because my GMA contribution went up that should be the driver of revenue growth. Absolutely not. The driver of revenue will be the store additions.
On store addition, you test yourself on a 15% number, but it's been trending below 15% for last few years. We were presuming this 15% should at least start coming through from FY25. But it seems we'll be again closer to 40-45. Why is there no breakout?
I take that feedback. We're trying our best. I completely feel and sense the point you're trying to make. We'll try our best to do what's needed for the health of the business and the growth of the business. Point taken. I have no defence on that standpoint. That is also our aspiration. We'll try to do our best.
On apparel you mentioned internal issues. On store opening, how much is internal vs external? Are there internal bottlenecks? To do 200 stores in next three years, you need visibility today.
It is multiple things, internal, external, everything. We're working on it. External is also a factor. Who else does what we do in the country, a country of 140 crore people, in retail at this scale? It's tough. We like to do things which are difficult. Even if I'm adding 40 or 50 stores per year, it's great. Can it be better? Of course. Is it testing our capability? Of course not. We can do significantly better than this. Maybe not this year, but the year after, I hope we will have a better rate of store openings.
Is it right conclusion that number of store openings will inflate accordingly over next one and a half years?
It's a mix - yes and no. It's a question of cost of construction in a particular city, size of the store, number of lifts, and stuff like that. Not very linear.
Last year we added one city in DMart Ready. Are we done with near term or will we see expansion in number of cities?
I want to comment on that because we are going to meet one year later. 12 months is a long time in digital commerce. We will play by the ear. We will see how things go over the next 12 months and decide what we need to do.
When GMA contribution was 28%, apparel was about 35% of that. Now with GMA at 22-23%, will apparel go back to one-third contribution or remain where it is?
I haven't ever disclosed what is the apparel contribution within the 22% or 28%. I have no view on where it will be. As a team running the business, are we too worried about this GMA going down? Of course not. We only focus on footfall, basket value, conversion, and overall like-for-like growth rate. Mix can be whatever. Mix tells you what people like you for. Mix is your story.
On quick commerce - top seven cities, they put together USD 4-5 billion sales. In top seven cities, your sales would be similar or tad lower. What are they doing right? How do you envisage 5 years from now?
I will not comment on them much - just that I have deep respect for what they have built. It's amazing. It's relevant for India. It's a smarter model than probably the marketplace. But it's different. It's addressing a different need. We are addressing a different need. All this is happening because the market size is very large. The sheer size of opportunity for grocery retail in a country of 140 crore is humongous. I'm glad many businesses are pursuing breakeven profitability. This country needs more success stories in retail. It's good for the industry, but serving a different customer need.
If you capture top 10 brands and they capture bottom 20 brands, with private label and 20 brands becoming bigger giving higher margin to QC, that gross margin could help them scale to different level. How to think about that?
I'm not able to comment on what they could do. It's challenging and exciting. We'll play it, we'll see how it goes. We'll compete. You could have more than one winner. You see it globally. Multiple players will coexist. This size of market cannot be fulfilled by just one, two, three players.
Any timeline internally on when you'll have answer to Minimax model?
Maybe another year or two, we'll get a very clear picture. We have EBITDA target, PBT target. Only if we get to those levels, it's worthwhile to put energy, build an independent team to scale it up. If you're seeing rapid increase of Minimax stores, that means we've achieved our PBT target.
On the product mix, foods is the only segment which has gained as a percentage of mix while the rest have seen a slight dip. Is it purely because of food inflation? In FY25, FMCG companies in HPC space will take a hike - non-foods FMCG should regain some lost share. You are focusing more on general merchandise and apparel - why is it not visible in numbers? There was a dip of around 33 bps. When do you see this reversing?
On the food contribution going higher - it is primarily driven around agri food inflation. While staples, edible oils went through a deflation period, but minus the oil basket, the agri side, that is the staple agri minus oil went through unprecedented inflation. On the GM and apparel side, we had a larger issue on the apparel side, but apparel is a smaller contributor in the GMA mix. GM is more or less back on track, trending equal to what we were prior to COVID. Apparel has done a very smart recovery. We did very quick improvements there, primarily around leadership, team, sizes. 70%, 80% of the work is already done. Apparel is the highest growing category amongst all our categories. It is more of an internal issue on the apparel side. We just needed to build a very good leadership pipeline. The team has done a brilliant job. We're seeing brilliant green shoots on the apparel side.
On DMart Ready, we have seen a year of consolidation and only one city getting added. What were the learnings? Quick commerce is now seeing more consolidation, more on service rather than discounting - rain fee, delivery fee, loyalty fee. Are you also thinking about quick commerce and starting to charge for some of these? What is your take, is the worst behind on discounting?
Our whole perspective has always been to have a divergence in terms of our approach to the business. We continue to chart our own course on the e-commerce side and we are pretty confident of expanding this business, albeit not as fast as you will expect. We don't intend to do any quick commerce. Our model is pretty robust and the learnings have been to try and get more and more revenue in the large towns / cities. That's the low-hanging fruit. A Mumbai customer or an Ahmedabad customer or a Delhi customer, they like e-commerce, they like material coming to their home. Serving that customer through our DMart Ready channel sounds very interesting and promising. So, we will continue with our own methodology of running the DMart Ready business.
Could this be a second year of consolidation? You have DMart Ready in few Tier 3 cities also - Kolhapur, Belagavi, Bhilai, Raipur and Anand. Could these be deprioritized given your business model?
Quite possible. Brick-and-mortar retail is still very aspirational and still fun and enjoyable in small towns. We clearly see that customers enjoy going to retail stores like ours in small towns.
Quick commerce has had big scale up especially in top six, seven cities. Are you seeing any impact on your big city stores like Mumbai, Bangalore? Does it impact the future store potential in top 10 stores?
We've been crunching data for the last two years. Surprisingly, it is not impacting us. If there is any one reason that impacts our metro revenues, it's actually our own ability to operate the store. If a store is not run well, infrastructure issue, peaked out, or quality of management is not up to expectation - that's when these stores struggle. Not really because of competitive context. A city with intense quick commerce versus one without could be a 1% to 2% SSSG CAGR impact. Maybe 1%-1.5% kind of an impact could be there. But is any of my store declining, negative? Do I see very large red flags? Absolutely not.
Any rethink - you have historically not had a big focus on fresh as part of your mix, and that's one of the categories which quick commerce companies have had high growth and high margins. Anything changing your approach?
Brick-and-mortar, I don't think so. There has to be some structural changes in the economy which prevents the roadside seller to stop selling fruits and vegetables. Only then could there be a case for modern trade to sell fresh in a profitable manner. That's our view, especially in a model like ours.
On the apparel segment, what exactly did we change? You said you're at 70% to 80% on that journey. So what is left to be done?
We have done whatever we have done for the current size of revenue, but we are imagining what we would be five years, 10 years from now. Apparel is very, very talent driven and individual driven - the guy or the lady running that specific category. From a team capability standpoint, the confluence of synthesizing between what DMart stands for and what apparel should be. It's not very easy. A category like apparel for a grocery kind of a model is very complicated. A lot of people who come from outside, their understanding of value retail, of deep discounting is very limited. So first, that buy-in itself is very challenging. Everybody brings in their own personality to the category. It's not very easy to get that synthesis.
You said you wanted to focus on basics in apparel. Is that thought no longer the case? You still want to have some fashion, but the type of fashion is probably what has to be realigned?
Philosophy remains the same. Basic, basic, basic. You can be fashionable yet by being basic. When you say fashionable, it's about being in trend. But how do you ensure that your product line is not susceptible to the vagaries of change of trend at very short notice. That's the whole idea.
On your comment that you do not expect salience to move back to 26% to 28% levels for general merchandise and apparel - why? Does that change how should we look at same-store sales growth from a new category addition basis uptick?
Whenever you open a new store, you get people from a larger radius coming. They end up buying a lot of non-FMCG. But as the store matures, the percentage of households who begin to buy from you from a smaller area significantly increases. That basically drives the intensity of food, FMCG and groceries here. This has been a secular trend for the last 20 years. As we mature and become larger, the food and grocery and the low-margin contribution will increase. We have to figure out how should you run the model such that you deliver on your profits in line with the construct changing with time.
I thought adding larger stores would have probably helped us drive, maintain that salience - that thought is not accurate?
That thought continues to be accurate because we continue to believe that having larger stores keeps you ready for the opportunities of the future. But at the same time, I do not want to build in very high expectation that we will go back to 27%, 28% and hence there will be a bump in gross margins. Not really. We're getting ready for the opportunities that can emerge because of GDP going up. But will that definitely guarantee 28% or 29% contribution of GMA? No, I don't think so.
On quick commerce - you pointed towards 1%, 1.5% impact. Is this reflecting more discounting in your view or just that the consumer is now keeping less pantry?
Stores which are doing exceedingly high revenue per square feet, its ability to grow at the rate of inflation gets a bit challenged. At the other end, you have quick commerce delivering excellent convenience. Almost zero friction and delivery at home. So the top end discerning customer probably who's shopping at DMart may fall off. To that extent there could be a 50 bps to 100 bps kind of change in growth rates for such stores. There is a disclaimer there - my observation and comments are only for this year.
On talent - any particular changes or incremental talent that you've hired at category head levels, on technology side, on e-commerce operations, anything to share on capability building side?
We are grappling with two things. We are running an enterprise which in absolute terms is very large. When you talk about a 15% or a 20% CAGR, in value terms, it's very large. And this value is being delivered from distributed points of sale - different stores, locations, culture, people. There's an enormous management bandwidth requirement. We are thinking about what this Company will be 10 years from now. What is the kind of talent we need to have today, in two years, three years, five years. The top leadership is thinking about how we should imagine the quality of talent we should have.
On store addition, you mentioned about lumpy additions. When you look at additions internally, do you think about it as percentage or more like 40 to 60 stores?
For this year also, we have projected 40-45 stores. I don't want you to project something very large in the immediate future. But in the longer term, we have to go at a higher run rate. The capability as of last year was we can even open 60 stores per annum. So you can take a range of 40 to 60 over the next three years.
In an economy where real estate is doing so well and there is formalization - what is the bottleneck when you are thinking about adding stores? Why is it lumpy? Why is it not as predictable? Is it the team issue or the site issue?
We decide that we will open these many stores in this much timeline. But in India a lot of things don't happen on time. And some locations also surprise you - they happen ahead of time, but that's more rare. It is unpredictable.
On DMart Ready, at a system level, what would be the average delivery time wherever the customer opts for delivery?
On home delivery, we ignore the time between 11:00 p.m. and 06:00 a.m. We don't count that as delivery time. Around 40%-45% of our deliveries happen within 12 hours. About 86% of our deliveries happen within 24 hours. Balance 14% is because customers plan the date of delivery - they purposefully pick a date which is later.
On 1%, 1.5% impact from QC - do you find yourself in a bit of a disadvantageous position because you don't have customer data? If a shopper moves to QC, you will never know. Do you think you may need to rethink on the data strategy?
The only one single indicator that probably we are blindfolded or refused to accept what is obvious is, if my sales or my profits is telling me something negative. If my sales are great, my customers are talking nice about me, my model is working perfectly fine, my margins are intact, my SSSG growths are intact, then why should I change? On QC - QC is convenience. QC is full price. It is completely opposite to what DMart stands for. DMart is value. DMart is, I would say, a little inconvenient. But it delivers great value. So we would like to play on the positioning of value.
From a top-down view as CEO, you have DMart and DMart Ready. One has a lot of data (DMart Ready), the other works on aggregates. Do you find that DMart Ready data to be rich? Is that a precursor to implement that in DMart?
There's a lot of data that we generate on every second basis within the business, and we use a lot of that data to improve our own input metrics. We're not super big into aggressive marketing or advertising. All the data we are generating we are using to improve our internal metrics. Will that be useful for DMart? By all means. As long as we know that the stores are working at the most efficient levels and the input metrics are showing the right directional trajectory, there's not too much else that you can really do with data. We are not big into using data to manipulate customers' behaviour in a short-term outlook.
Any thoughts on integrating online information for the offline store?
I'll tell you only one very clear insight. The digital space just fascinates you in terms of what all they can do which we cannot. There are some very powerful elements of what online space can do which we cannot, which is the cost of experimentation and the long-tail item selling capability. Brick-and-mortar can't do that. That's where it complements - they are the big brother and not us. It's very humbling what digital can tell you, teach you at very short notice. We're leveraging the information and the learning.
For e-commerce you are consciously deciding not to grow very fast. Are there any areas where we should speed up? On formats like Minimax - is there an opportunity to take that up? We added six stores this year, how does that fit into our growth strategy?
From e-commerce, this is a very divergent call I'm making from what I actually thought - we are seeing that the home delivery model is a better model. So it's exactly opposite of what we used to say earlier because the numbers prove it. Home delivery in large towns is the way to go. We should do whatever it takes to build fulfilment centres in large towns quickly so we are able to deliver in at least 12 hours. Primarily growing faster than what we are doing right now in large towns in DMart Ready is the way to go. On Minimax, it's still an experimentation. We feel that the market is not yet ready for that model.
We saw advertising on first three orders free on DMart Ready. Was there a tactical call to get more customers? What kind of success?
We are seeing some good kind of traction on that promotion. The idea is to let customers sample our service. Our data has suggested that people who use our service for two or three times tend to stick with us because they really grokked the value we are providing. We started this a few months before. It's starting to show some really good results.
Mathematically, as your cash from operations increases, and as you're opening more stores in smaller towns, would the number of stores just mathematically go up because we have more cash available?
Opportunity to open more will increase, definitely. If you remember post-IPO, I used to talk about 10 to 15 stores. We moved from there to 40 to 60 stores. Obviously, it goes up. Our entire effort is in that direction.
In the previous call you mentioned proportion of overall store count located in cities with population of more than 1 million had declined to 60% in FY23. Was this a trend witnessed in FY24 as well?
We've ensured the homework was better this time. We've got 1% better in less than 5 lakh town population - we were at 28% of store cohorts in FY23, it's become 29%. In FY20, that number was 21%. So in five years, we've got an 8% increase in store count in this pop strata.
On store addition, while a lot of stores go back into clusters where you're already present, you do keep adding stores in newer areas as well like Rajasthan, NCR. Are these stores tracking metrics similar to those in your core geographies of Maharashtra, Gujarat?
Broadly, everything is in line. There is no major divergence. Younger the vintage, financial metrics will be relatively lesser than the balance cohort. But the newer store cohort trend line has been the same for the last 10 to 15 years. Everything under control. And irrespective of regions. The model cuts across all SEC, ethnicity, culture, everything.
In Q1FY25 results release, you mentioned some opex had gone up due to efforts on improving service levels and building capabilities. Could you explain which line items?
Two things are happening. We've been all talking about product inflation, but at a lower level, wage inflation is also going up rapidly. The second thing is, we are also working on building our capabilities, talent, all of that from a perspective of a little bit more longer thinking - what will this Company be 10 years from now? It's a combination of both.
On DMart Ready - Mumbai is your oldest city. Are you present in pretty much all pin codes in MMR that you would want to be?
We are present in all but a couple of pin codes, which are actually not very serviceable. MMR, Mumbai Metropolitan Region, we are fully covered.
Is DMart Ready consumer seeking convenience at the margin or more value? You've built DMart Ready - EBITDA margin is still minus 2% to minus 3%. Is there an opportunity for price discrimination between physical store and online? Why not pursue that as a convenience opportunity which can price discriminate?
The thought is very clear - just because it's digital, we are not saying it will be convenience. Our positioning will be on value. We are very clear because in the consumer's mind, DMart stands for value. We don't want to create dissonance in the customer's mind. The idea is, how do we build an operating model that in spite of delivering at home, can bring that value proposition saliency in the consumer's mind?
On general merchandise - for full year, revenue mix was 22.37%, in H1FY24 mix was 23.21%, implying H2 was 21.6%, which seems like deterioration. While you say Q1 has become better, how do we reconcile that?
I've not done the numbers the way you've done, but I get the sense. First quarter is actually from a revenue mix standpoint, the best. Then Diwali quarter (Q2). And the worst is Q4, March quarter. With reasonable confidence, I can say that this financial year will be equal to or better than FY24 GMA contribution.
Apparel has bottomed out. Is it an opportunity to shape general merchandise mix non-apparel as well?
Apparel we believe we can go back to the older days of contribution, maybe pre-COVID. The other part is, we see an opportunity in GM, general merchandise to be a larger opportunity in the long term. So for us, the general merchandise opportunity is a larger opportunity and apparel is more defensive. GM salience to our model is better than apparel salience is to our model.
On store size - last two quarters average area is around 40,000, was way higher in '22. Is 40,000 the right template?
Very variable. We don't look at it like that. Whatever land is available, what sizing, the construct, all of that. It is a broad range we play in. Historically we were at 30,000-35,000 square feet. Obviously we see opportunity in the store size being larger, but forget the range, don't go by the 5%-10% vagaries of average store size every year.
Globally peers tried different experiments. Can something like Costco be done in India by you? Also, in smaller towns DMart is a destination - is there thought to monetize that footfall through different means like good food or entertainment?
Retail is very intrinsic to the culture, history, many other soft aspects of a country. You cannot usually parachute a model that has worked somewhere else, specifically when it comes to value retail or grocery. Local retailers automatically get an advantage over an MNC kind of retailer. On monetizing other aspects - the moment you start diverting focus from your core business, it's not a good sign. The DMart model has got such humongous multi-decadal opportunity just by doing this. You succeed in this only when you have razor-sharp focus. If you try to distract yourself, it will diminish value. Focusing just on doing DMart is the way to go.
On private label - we see a lot of new D2C brands on the shelf. Is this experiment, or trying to maximize gross margin, or pull-driven?
It's only pull, pull, pull. It's just customer preference. D2C brands who become reasonably large and now want next level of growth come to us - that's the right approach. People should come to DMart only when an INR 10 crores company wants to become INR 100 crores. A company who has zero or INR 1 crores, if it comes to DMart, the chances of success are going to be very limited.
Capital commitments have gone up to about INR 3,600 crores versus INR 2,100 crores earlier. Does this have any bearing on number of stores? Also on land cost - INR 7,300 per square feet for 40 stores added this year versus INR 4,600 last year. Significant inflation - is this account of city mix or pure inflation?
Whenever you buy land, even though it's not operational, it goes into your fixed assets. So the entire land aggregation could be for stores not only opening that year, but also next few years. It's the wrong way to look at it. Second, if I take a three-year, five-year period, land prices have definitely gone up. In Bangalore, Hyderabad or many small towns, the price at which we used to buy land 5-7 years back vs today, of course there is a huge level of inflation.
Capital commitments INR 2,100 crores vs INR 3,600 crores Y-o-Y - explanation?
Capital commitment is an outcome of open purchase orders at end of the year. It depends on how many purchase orders are in various stages of progress. The entire cost of the purchase order open is backloaded. It's a position at a point in time. If I have a store with capital commitment of INR 20 crores, that will inflate the number. It's a fair indication of the likely construction cost we are budgeting to incur over next two-three years.
On DMart Ready - number of pickup/delivery points end of FY23 vs FY24?
We've shut down around 200 locations. We had 573 last year. There are 341 this year, we shut down 232.
Has the area of operations come down accordingly?
No. This was to improve operating leverage. Earlier if pickup-points were in 1-1.5 km radius, probably it has reduced. Maybe we reduced it to increase the range. Now you'll find one pickup point every 3 km or 4 km range, to improve operating leverage.
Any more drivers lined up which can increase your discount versus MRP? You had done direct delivery 1-2 years ago which gave you 100 bps. Any other drivers?
It is the same playbook. It is about private labels, GMA contribution, things like that. It's about overall top line growth rate and hence how important you become for your suppliers in the branded space.
On DMart Ready, what is now the ratio of home delivery vs pickup? Quick commerce players as they gain scale, their terms of trade improve. Where does DMart Ready stand?
When suppliers' contributions or sales increase, their bargaining power will also increase. We are cognizant of that. What we believe in retail, which is process-oriented, no IP, it's about who does it better. From a cost level, we have a huge advantage compared to quick commerce from cost of operation standpoint. Where they have an edge over us is the gross margin. Their ability to earn gross margin is significantly better than us because they operate on the principle of convenience. Both will coexist. There is a set of customers who want delivery in 15-20 minutes, paying premium - lovely model. At the same time, set of customers who deeply appreciate value will come to us. We'll also try to take a decent share of even the discerning customer's wallet share.
With 341 pickup points each maybe 200-300 sq ft - have you thought of converting them into dark stores to participate in e-commerce market?
200 square feet is not good enough to run a dark store. A dark store needs at least 5,000 to 7,000 square feet to even do decent justice to customer basket. So 200 square feet can't work.
On bill cuts - they've been going up. What about shopping basket size trend? Do you see consumers experimenting more with brands - does that require you to increase SKUs?
Basket value has gone a little up in the last year. During COVID basket values went up which meant trips reduced. That has maintained. Basket values have been maintained. The whole pursuit of buying team is to catch the trend - what people are buying, what's new in the market, continue to be relevant to the shopper.
Revenue per square feet has come back to FY20 levels. Average revenue per store in metros vs Tier 2-3? What else is driving revenue per square feet higher?
It's multiple things. This is a blended average. We look at SSSGs at store-by-store level basis age vintage. Footfall going up, sales going up for each. Mindset is store by store. Younger the store, higher the growth rate. At company level we are at INR 32,941 per square feet. Each cohort is in very different ranges. Older stores at multiplier of this. Top 10 stores have highest multiple, sometimes don't even grow at inflation rate - that store has peaked out. The smartest thing is to open another store close by and distribute the revenue.
On DMart Ready gross margins - what levers do you see to improve gross margin profile?
Assortment is the key. You have to have a reasonable divergence on the brick and mortar assortment to improve the margin profile of DMart Ready. All the hard work that is done is done on the opex side. From opex side we are doing pretty well. To make DMart Ready profitable is more of a margin challenge. To make money in this business, it's a game of improving the margin profile.
Out of the 22-23 cities, how many would be breakeven at EBITDA level? You indicated metros had broken even earlier?
I have not indicated that. I have said Mumbai is better. From 8.3% or something negative, we are at 6-point-something negative, so at 6.3% of negative, Mumbai is better than that. Too early to comment on all these numbers right now. Even getting these numbers in place is pretty good. The trajectory line on cost optimization is in place. This business is all about how we manage gross margin profile.
On pharmacy category - what is the update?
It's still work in progress. We're quite happy with the outcome, but it will take reasonable time to scale this up. We have done this business before. It has played out the way we had imagined. The challenges are about team buildout, structure, people, infra, stock, technology. It's a great complement to the customer. Customers enjoying buying their regular medicines at great value. A great complement to the main DMart business. Currently in seven stores.
On apparel segment - private label is becoming a sunrise sector. How are you thinking about private label solution divergent to your FMCG line of thinking?
With new team, new thinking, we're sharpening that. You will see lot of consistency on branding, on colour themes on the apparel side. There is merit in bringing some discipline in basic colour coordination, branding. It is work in progress. Almost entire thing, 90%-95% of it is private label. When do you call it a brand? When you're charging a premium for the brand name. There's no such premium. We negotiate cost of product at fundamental factory cost plus small margin for the supplier. Then we put a markup and sell. So it's not a brand.
On DMart Ready growth rate - how would you define right kind of growth rate from 3-5 year horizon?
We don't have a very clear number to give to the e-commerce team. The e-commerce team in last two years have been told - grow as much as you can. We know what the operating model is. It's up to them and their ability about how fast they can grow. There is no restriction. The larger point is how quickly can you grow? How many additional fulfilment centres can you add in cities like Mumbai, Bangalore, Hyderabad, Gurugram or NCR?
Having done hard work on opex, what hard work are we doing to drive revenue growth - customer awareness etc?
The e-commerce business is nothing to do with making people aware. What's the point making people aware if I don't have capacity? I have to first build capacity. We had bus hoardings where we plastered buses with DMart Ready ads in Mumbai because we built capacity. First is building capacity, then spending money on telling people to come and shop is very easy. The difficult part is building capacity.
Any new categories similar to pharmacy entered in FY24?
No. Anything that makes the DMart brick and mortar business strong is what we will do. Anything that will make DMart Ready business strong is what we will do. Anything beyond that, we should not do.
On DMart from 10-year perspective and value first positioning - over next decade, won't there be a larger cohort that moves to convenience as GDP per capita improves? Should you plan about business model now and look at convenience going forward?
For the same category of products, the value or mid segment is always the largest pie of the market. We don't know how much bigger value will be, but value will be a larger segment compared to convenience even in grocery. We'd like to play in that. It's got no relevance to per capita income. Look at Western Europe, USA - value is where the biggest retailers are. We would like to play in the space of value.
On Minimax - independent offline model or part of delivery network, then unit economics differ and you could look at larger openings?
Earlier somebody asked on this Minimax format. You don't need to overthink. Even we are not overthinking on this model. It's just a trial, but we aren't seeing much progress there. It's just there to check if something is happening. Nothing exciting yet, to be honest.
Of the 40-45 stores targeted this year, share of split stores that opened because certain stores got maxed out?
They'll be a very small component. We have these maxed-out situations in cities like Bangalore, Hyderabad, Mumbai. But our store openings are in significantly larger number of cities. Last year we opened stores in 12 new cities. It's a mix. You can't put a number or model anything around this.
You reemphasized importance of going deeper into the market. We have not added any new state in last many years. Does entering a new state make it easier to up the pace of expansion? Distribution centres increased 49 to 62 - is it precursor to invest before ramping up?
If you're looking at distribution centre addition as a precursor to new state entry, no. It is the other way around. Whenever you go to a new state, we don't pre-empt investment through distribution centres in that state first. We supply them from existing distribution centres which is more prudent. Only once we get critical mass, we build distribution centres. Going to new states - it's just more bang for the buck because we know older states better. We do see opportunities of going to Orissa, going to Uttar Pradesh and you will see some stores coming up in UP. We have already tied up a few firm deals.
When you enter a new territory, GMA mix is higher and goes down as you open more stores. Should we expect cyclicality in GMA when you enter a new state?
Absolutely. Hypothetically suppose I add 400 stores and another 400 stores next year, my GMA contribution will go above 30%. Could be disproportionately higher. But that's not necessarily a good thing. There's over-obsession on this GMA contribution because optically it gives you better margin. Always remember absolute revenue is the key driver of profitability. INR 30-40 crores store with 35% GMA contribution but INR 150 crores store with 20% GMA would be giving you better ROI.
Fashion apparel is personality/team-driven business - how are you trying to institutionalize given you're building business for 10-15 years?
You reduce the impact of personality. It's as simple as that. Not easy, relatively. That's why you need to be significantly, exceedingly more stubborn when you're dealing with categories like apparel in terms of evangelizing the ethos of what DMart stands for - not everybody believes in it.
On gross margin around 14.5% - DMart Ready gross margin has difference of 200 bps. Brick and mortar would have 57% contribution from food - this proportion would be higher in DMart Ready?
That's not the way to look at it. You have to look at e-commerce business as similar to the FMCG business of brick and mortar. Because the non-FMCG selling or ability to sell non-FMCG in e-commerce is not so easy. How you play the assortment of digital space is going to be exceedingly challenging. How do I bump up that margin? It's not just by replicating what's happening in brick and mortar.
We have terms of trade with top five brands in non-FMCG also - why margin difference?
That's a wrong assumption. There's no concept of terms of trade in non-FMCG space. Non-FMCG space is very transactional and all margins are front-ended on the product itself. The principle of operation there is very different.
If margin expansion is happening for DMart Ready, what are top 2-3 drivers over next 2-3 years?
It's just the assortment play - assortment which will drive more margin and your ability to sell that just by someone seeing on screen, and how do you make that profitable. The moment you bring an assortment to give 30%-40% gross margin, your return rates will rapidly go up. What is the net margin and is it value accretive? That's the question. Very challenging. Reflected in what you see in the world. It's very easy to bring topline. Where is the profit?
On bigger stores opened in last one year - hits and misses or learnings?
The biggest issue is we have to up our game as the scale is going up. Scale can become a monster which can bite you if you don't do it right. You end up losing more than gaining if you don't manage. Scale is creating challenges for us. We have to be cognizant and build capability so that how customers thought about us 5-10 years back, the perception should not diminish in her mind. Same for our employees and vendors. With scale, everything gets diluted. That's the biggest threat for the business in the long run.
Given quick commerce is going to scale up much faster - is it right time for us to speed up?
We will not do things because somebody else is doing something. We will do basis our capability and our competence and let the best man win.
Over longer term, if our private label segment becomes much bigger pie, do we plan to open private label-only stores?
Doesn't make sense at all. The value of private label is when something next to it is at 30% or 40% higher price - then people perceive the value of private label. Private label has no place to be standing alone and selling. The principle of private label is you leverage on operating cost. Operating cost is almost zero because it's riding on same rails. Doesn't make sense to have anything independent.
Last year you mentioned thinking about 20% store addition. This year you've spoken 15% number. Why the change in mental framework? Are you seeing difficulties on real estate front?
It is the same. The theme is the same, 15%, 20%. You replace everything 15% with 20%. That's the aspiration. We want to add more stores. The single point agenda is store addition. The store addition will drive the CAGR. So no change.
On DMart Ready - has MMR broken even at PBT level?
No, it has not.
On Reflect Healthcare - thought process behind launching? How much space carved out?
Pharmacy takes around 600, 800, or sometimes 300 square feet. So a very small space. We are trying now the easier ones, where we have more space. Very high throughput footfalls, where we'll get operating leverage by having at least seven to eight stores in a city. That's stage one.
Will it require additional opex?
It's very inconsequential. Just the furniture. Nothing much.
On DMart Minimax - 21 stores, you added 6 last year. Very unusual of DMart ethos - you typically perfect a model before expanding. Speak about this format?
We've been contemplating, is there a way for the Minimax Store to merge with the pickup point. That gives a far better omnichannel play. We took down the path of extreme discounting with omnichannel. It's work in progress. Financial metrics are not bad - that's why we added a few more. The profitability metrics are actually better than the pure play digital or pickup point metrics. But is it good enough to say can we have 500 or 1,000 locations? Not yet. Still in phase of perfecting the model.
A few years back we contemplated entering big box wholesale format then put on back burner - any thoughts?
I don't think we should get into it. It's not even on the back burner. It's out, it's in the trash can.
On accounting - when buying property with land, how do you account it as capex?
In a ready-built property, we do a valuation of the property when the store opens and then split the cost based on valuation certificate into land and building. You cannot put entire into building - tax authorities will object because building enjoys depreciation. Value we pay for built-up property is inclusive of land which comes with the property.