DMart’s Share Price Drops by 8% in A Day [14-Oct-2024]

DMart’s share price experienced a significant drop of over 8% following its Q2 earnings report for FY25. Clearly, it did not meet the street expectations. This led to several brokerage firms downgrading the stock and reducing their target prices. Currently the stock is trading at Rs.4,120 with one brokerage firm downgrading the target price to as low as Rs 3,702. It means, the stock can fall further by another 10% in coming weeks. There’s a mix of concern regarding DMart’s valuation and future prospects. 1. ValuationSome posts highlight concerns over high valuation. The stock is trading at a P/E ratio over 102. Though the PE100 may display DMart (Avenue Super Mart) as super expensive, but the my Stock Engine’s algorithm is sees it as only “Slightly Overvalued.”Till about 2-3 years back, the same stock was trading at PE170 levels. Now, its P/E has contracted to around PE100. But the problem is not actually PE contraction, but this feeling among investors that even at PE100 the stock is expensive.DMart has been known for its rapid expansion and high valuation in the past. But now, the investors are now questioning the lack of a moat in its business model.Read about DMart’s business model.2. CompetitionThe line of question related to DMart’s moat is especially dragging more attention due to the rise of VC-funded startups in the retail space.Following are a few notable start-ups we can keep a watch on:Blinkit: – Blinkit operates in the quick commerce segment. It offers rapid grocery delivery services. This model directly competes with DMart’s value proposition of low prices by providing extreme conveniene. In urban areas where time is of the essence, services of Blinkit type business is gaining market share.Zepto – Zepto, another quick commerce player, has been making waves with its promise of delivering groceries in minutes. This startup represents the shift towards immediate fulfilment of grocery needs. Its offering is a contrast to DMart’s model of physical shopping experiences with low prices.BigBasket: Is another competitor of DMart in the online grocery segment. Both aim to attract customers with convenience and competitive pricing.These startups, with their focus on technology, quick delivery, and omnichannel presence, offer different value propositions that could challenge DMart’s market position.3. Business Model of DMartDMart, operated by Avenue Supermarts Ltd., has traditionally thrived on a business model centered around offering products at the lowest possible prices.It focuses on bulk sales, and maintaining a no-frills shopping environment.Its success hinges on:High Volume, Low Margin: Selling goods at a low margin but compensating through high volume sales.Store Ownership: DMart owns most of its store properties to save on rental costs. This way, it contributes to its low-cost structure.Strategic Expansion: Carefully selecting store locations to ensure high footfall and operational efficiency.4. Challenges4.1 Rise of Quick Commerce:Quick commerce platforms like Big Basket, Blinkit, Swiggy Instamart, Zepto, and even Amazon’s grocery services represent a shift in consumer behavior towards convenience:Speed and Convenience: These platforms offer delivery in as little as 10-30 minutes. They are now catering to the immediate needs of consumers. This is something that traditional brick-and-mortar like DMart is not able to match for the moment.Urban Lifestyle Changes: Increased urban living, smaller household sizes, and the preference for instant gratification have boosted the growth of these platforms. People’s choice to go to brick & mortar stores for discounted grocery and vegetables shopping is slowly downtrending. Families in their 20s and 30s do not prefer dedicating their time slots to this type of activity.4.2 Impact on DMart:Consumer Shift: A segment of DMart’s customer base, particularly in metro and tier-1 cities, might prefer the convenience of quick commerce. It is especially for top-up or urgent purchases, potentially reducing footfall in DMart stores.Pricing and Margins: DMart’s model is built on low prices. Similarly, quick commerce platforms are also offering discounts and cash backs. This way, they can compete closely on price, especially when considering the added value of time-saving for consumers.Change in Buying Behavior: Quick commerce encourages smaller, more frequent purchases. On the contrary, large purchase but less frequent shopping trips benefit stores like DMart. The point is, what customers want now, small or large purchases? Answering this question will tell us why stores like DMart are losing and quick commerce is winning.Operational Challenges: DMart’s model doesn’t inherently support ultra-fast delivery. Its attempt with DMart Ready has seen limited success and illustrates the difficulty in pivoting to a quick commerce model. The problem is due to different operational requirements like dark stores, last-mile delivery logistics, etc.Market Perception and Stock Performance: There’s a growing narrative that DMart’s growth might be slowing due to this competition. This type of commentary is affecting investor confidence and its stock performance.4.3 DMart’s StrategyValue-Added Services: DMart is introducing services like a pharmacy within its stores as a pilot project indicates. It is DMart’s attempt to add value beyond just grocery retail.Focus on Core Strengths: DMart continues to expand its physical footprint. It is focusing on areas where quick commerce might not be as penetrative yet.DMart Ready: Through DMart Ready, there’s an ongoing experiment to tap into online sales. Though it is also truw that DMart is facing challenges in terms of profitability and scaling.Price Competitiveness: DMart might further emphasize its pricing strategy to retain cost-conscious consumers. These customers do not mind the lack of immediate delivery if the price savings are significant. Generally, middle aged people in 40s and above can be a potential target customers of DMart.ConclusionDMart faces a significant challenge from quick commerce platforms that cater to a new age consumer behavior.The consumer preference is now chaging. They are favoring convenience over the traditional benefits of bulk buying at discount prices.However, DMart’s response involves a mix of sticking to its knitting by enhancing its in-store experience and value proposition. On the other hand, they are also cautiously experimenting with online models.There is a definite trend reversal in the consumer’s preference. It will certainly have a long-term impact on DMart’s current business model. Whether DMart will live up to the expectations of its investors will depend on how effectively it can adapt to what consumers want.I think, instead of trying to counter the quick commerce trend, DMart should evolve and include it to its current value proposition. This is what all great companies, who has survived the market cycles, do in times of crisis.But the question is, is DMart (Avenue Supermart) is in crisis at all? I think, answering this question with certainty today will not be fair to DMart.Have a happy investing.