EDLP (Every Day Low Pricing) is a concept hailed by FMCG companies around the world. India being a price sensitive market, of course loves it too. But, looks like Avenue Supermarts (DMart) has taken it to another level strategically. And that is why Avenue Supermarts has now become the 11th most valuable company in India in terms of market cap. With a market cap of more than 1.58 lakh crores, DMart has superseded Nestle India as well.

DMart is doing pretty well since last few years. This is quite evident with RK Damani (Founder of DMart) becoming the second richest man in India (according to Forbes) and now the company becoming 11th most valued Indian firm by climbing 9 places in 3 months to achieve this. On the other hand future retail (Big Bazaar) is still struggling. While the lockdown made the conditions worse for Big Bazaar (it reported a revenue loss), DMart wasn’t hit hard at all. But, why did these companies in the same industry face it differently

How did This Happen?

Business Model is a powerful avenue that creates all the difference. So, let’s discuss the aspects of business models of both these retail giants. 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. DMart’s sales revenues come majorly from tier-II and tier-III cities while Big Bazaar’s penetration there is comparably less.

DMart usually purchases land on the outskirts of cities or leases it whereas Big Bazaar stores are located in malls. This way DMart saves a lot on rent costs. People usually get frustrated while getting their groceries billed at super stores. DMart stores have more number of billing counters so that the turnaround time is less. 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.

Besides this, you would find bigger packages of goods (for example biscuits) at DMart. These packages help DMart sell in bulk and also the customers perceive a better discounted price. Also, Avenue Supermarts 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.

Fast Moving Consumer Goods Industry (FMCG Industry)

FMCG is the 4th largest sector of the Indian economy. It constitutes 3 major segments of food and beverages which account for 19%, healthcare for 31%, and household & personal care for the remaining 50% by revenue. The overall market for FMCG has grown at 12.88% (2011-2019) with $83.3 billion in revenue in 2019 which is expected to reach $103.7 billion by 2020 and is further expected to grow at 14% CAGR (2020-2025).

The market size across rural India has grown at 11.32% (9yr-CAGR, 2009-2018) and is expected to grow at 37.5% CAGR (2018-2025). Demand for goods has been increasing with the increasing disposable income in rural India which contributes around 45% whereas urban segment accounts for 55% of the total revenue of the FMCG sector. India’s demographic profile plays a major role in the growth of this sector. Urban development initiatives by the government, as well as the increasing middle class of India, have led to an increase in the market size. 

Consumption in the new emerging cities is growing at a faster pace than India’s metro cities. With the higher technological awareness among millennials, changing lifestyles, increasing awareness for health & nutrition, and the penetration of smartphone and internet connectivity have boosted the e-commerce activities. In India, one in every two items purchased online is from FMCG products comprising around 56% of total e-commerce sales by volume. According to Nielson, a market research firm, e-commerce contribution to total FMCG sales is expected to be 11% by 2030. 

Government initiatives such as the implementation of GST (reducing the cascading effect of indirect taxes) helped in reducing costs that can be passed on to the final consumer. 100% FDI in single-brand retail trading (SBRT) and easing of local sourcing norms brought in more investments. Permitting e-commerce without brick and mortar stores and infrastructural developments helped in improving customer experience, better connectivity, and establishing robust distribution channels aiding to the growth of this sector. 

Given the variety of items and an increasing number of local players, it is one of the most competitive industries. To maintain brand equity, firms have to spend a lot on marketing and branding activities which is a good expense for existing players because it acts as a barrier for a new player to enter this industry. This rising competition gives bargaining power in the hands of consumers. With the abundant supply across the country via existing distribution channels and entry of unorganized domestic players, demand is still rising with the rise in the population of India.

Companies with a larger product portfolio, established distribution network and market share or market reach may have better utilization of resources. So, efficient utilization of resources/capital is also an important factor in driving profitability.

To pick a stock in this FMCG sector, apart from economic and demographic trends following are the financial aspects which also should be considered:

• ROCE: Considering the additional expenses on marketing and branding activities, and sustaining huge distribution network, the firm should utilize its capital efficiently with ROCE maintained at least 34.13% (5Yr-Average)

• D/E ratio: To compete with established companies that generally have a lower D/E ratio and considering the uncertainty it is imperative to maintain the D/E ratio below 0.28 (5Yr-Average).

• Inventory days: To assess operational efficiency, inventory days can be considered. It is good to maintain lower inventory days that are below 45.99 days (5Yr-Average)

• Operating profit margin: With the capacity of economies of scale, firms generate high profits which should be closely monitored. It should be more than the industry average of 5.39% (5Yr-Average)

The better the stock fits into the aforementioned criterion, the better option it would be for investment. It’s quite simple, first, the criterion needs to be right to select the right stock. The data regarding the company’s revenue, expenses, and financial ratios are available on ticker.finology.in