The most elusive CEO on D-street,
Neville Noronha, Managing Director & CEO,
Avenue Supermarts,spoke with
ET Now’s Ayesha Faridiin a rare exclusive.
You have said previously that you are more comfortable with margins of 8-8.5% as at that level you can provide great value to the consumer. Will the current levels of competitive pricing offline and online allow you to hold on to that margin range?
A range of 4-5% PAT margin is what I have repeatedly said. Having said that,marketsare dynamic, it can even go lower sometimes. Higher than 5% is a rarity that may be seen only in extremely good years.
ForD-Mart, store openings have led to revenue growth. A few quarters back you mentioned that store openings have to improve – are you satisfied with the progress made on this so far?
This year has not been satisfactory on store openings. We opened only 21 stores. We aspired to open much more but that didn’t happen. We hope to do better in FY 2020. Same store sales growth (SSSG) partly made up for this drop in store openings. Our SSSG has pleasantly surprised us and also encouraged us to get further better at execution.
You were at around 164 stores as of December-end. Given the size of stores and your preference to own real estate, what can be the potential store target over the next 10 years?
We do not give any forward looking statements. All we say is that the market opportunity is extremely large. Business is not going anywhere. This is not the fastest finger first business. This is a business that will need multiple players with multiple formats.
You had said, incrementally, new store openings will be lower in the west as you have reasonable penetration in that market. In markets like north, east and south, how has your experience been and are the old-store metrics similar to the west?
Newer states are tougher and it takes time to understand. So to that extent, they do not do as well as existing markets. We are still not operating in the East, while North has been a relatively new market for us and we are still learning. Karnataka, AP and Telangana have been relatively old now and we are doing fine there.
Is the strategy to sell cheaper and gain market leadership an offshoot of the EDLP (every day lower price) strategy thatWalMartfollowed in the US?
There are numerous global as well as local players who follow the EDLP principle. We try and learn from all. We do admire Walmart a lot. “Made in America” by Sam Walton is a must read for every D-Mart Manager. However, selling at low prices while important is not the only factor for success in retail.
Is the phase of experimentation with regard to lower prices done or is there more to go. I’m asking this because these have a direct bearing on margins?
Pricing is a continuous process in value retail. We do not see it as a stop-start-stop process. There is little of science and a little of art in that piece. It’s largely entrepreneurial. Our founder, Mr Radhakishan Damani built that concept. A lot around assortment and pricing principles came from him. We are all building on that legacy. The challenge as well as excitement is pricing — pricing of products and pricing of costs.
With real estate softening can we expect some momentum in store expansion now? What’s the strategy, tradeoff between owned and leased stores?
Real estate is a challenge in our country. Pricing is not the only determinant. So while slowdown in the real estate industry does present more opportunities, there are several other challenges such as clear land title, different approval mechanism from state-to- state and local nuances which need careful assessment. We do prefer buying land and then constructing, however, we are open to long-term leasing of stores as it helps us accelerate growth. Just buying land to build stores is tough. Won’t help us accelerate.
So, in that context, will the annual store count/expansions be slower than historical average?
Real estate is tough. I have said this before; our model of acquiring real estate slows us down. We are seeing it now. We are hence looking at lease and also looking at acquiring stores through other means to expand faster. However, our store size ask is again a limitation to pace of growth. There aren’t too many large format stores available. Most are available in malls where costs are extremely high. We will not go there if we do not have favourable terms. It will take a few more years for mall owners to understand the value a retailer like D-Mart brings to the entire mall. A D-Mart store could bring in revenue per square feet that is 5-7 times that of a mall, but our margins are extremely thin. Hence malls must offer rent at reasonable rates to us if they want footfalls to significantly increase for the entire mall.
So when will D-Mart become a pan-India player?
We follow a cluster-based expansion strategy for store opening. Currently, we are present in 11 states and 1 union territory. We prefer to open more stores in states where we are already present and penetrate deeper in those areas. There is no aspiration or strategy to become a pan India player. Quality growth is good growth, irrespective of the region it comes from. We do not mind being called a “regional retailer”.
Big Basket and other e-commerce players are gaining market share in the grocery segment. Their growth is more than that of DMart. But if that’s the case, how is D-Mart gearing up for that?
The market is extremely large. Right now, our own weaknesses limits our growth. We are working hard to improve our own capabilities. Just to give you some perspective, market size of retail in India is expected at ~USD 960 billion by 2020 and is likely to grow at 8-10% every year. Every retailer growing is good for all of us. It’s nice to see momentum in all channels of retail. Even local kiranas are doing good business.
Since you’ve been a late starter to join the online retail bandwagon, what are your plans going forward? And what kind of investments would you commit for the expansion?
We were a late entrant in the brick & mortar business too. We were extremely slow in the first 8-10 years. I think even the online business is trending that way. It’s in our DNA not to lose money recklessly. Some see that as a good approach while others find it not aggressive enough. But
kya karein, we are like this only. We are taking e-commerce one quarter at a time. Reviewing and course correcting, in small ways.
So, when does D-Mart Ready become profitable?
Right now we aren’t even thinking that way. The better question to ask is how much are we ready to lose every year? Considering the temperament we all have, we try to make it as minimal as possible.
You have so far shied away from a loyalty programme. However, most of your competitors have one and it also allows gathering of data that can be used for trend analysis. Do you still believe it is not required in the current context?
Yes, but It’s getting tough to stick by this. I get a lot of push from all sides but we are holding out. We believe that this business can also be built without getting too close to the shopper. We would like to be seen as a retailer who treats all shoppers the same way. It’s a crazy thought in today’s world of big data and personalisation.
TheIKEAphilosophy is that the customer will choose price over time. As you look ahead, do you see a scenario where you’ll have to cut costs to sustain? Is cheaper pricing key?
Value retailing is not equivalent to selling cheap. We are not selling stuff cheap. So you do not need to cut costs. Value to consumer and frugality as an operating principle is part of the business model, it is part of the culture, it is a way of life. That’s why EDLC (Every Day Low Cost) precedes EDLP (Every Day Low Price) and not the other way round.
Do you believe that though? That, for a customer it’s price Vs time that wins?
Different businesses have different propositions. Some focus on value, some on convenience. Kiranas work on convenience and they also do so well. Nothing happened to them even after nearly 15 years of rapid modern trade expansion in this country. So, different businesses have to figure out their core competence and sweet spots to operate profitably.
What would you say is the biggest disruptive trend that you forsee for the retail industry?
Anything that creates an ecosystem of winner takes all is very disruptive, especially for the marginal operators.
While at D-Mart, you have always treated the customer as the king; you’ve also created shareholder value in the bargain. While I’m certain customer will continue to be king for you, what can you promise your shareholders?
This business was built to what it is today when nobody was watching for an extremely long period of time. We just did one thing all through those years – single minded focus on the business. The only promise we can make is that we will continue to do so.