Big Bazaar vs D Mart – What investors can learn from this Hare and Turtle story

Future Group launched its first Big Bazaar store in Hyderabad in 2001; While its rival in the brick-and-mortar space, Avenue Supermarts launched its first D Mart store in Powai, Mumbai in 2002.

both entered India’s consumption story around the same time.

While the focus of Big Bazaar was fashion, food and general merchandise; D Mart’s focus was on grocery and general merchandise but not exclusively on fashion.

Fast forward to 2011 (ie 10 years after the launch of their first store)

Big Bazaar grew to 250 stores, while D Mart’s number of stores patiently grew to just 10.

Interim Verdict 10 Years After Launch: Advantage Big Bazaar by a margin of 240 stores.

Analysts tracking Big Bazaar (Future Group) at the time had written off unlisted D Mart as a marginal player in the offline retail space.

In the story of the tortoise and the hare, Big Bazaar, the rabbit, was clearly winning with D-Mart, the tortoise, nowhere close in the frame.

However, the real fight started after 2011…

Let’s look at the expansion strategy for both companies.

Future Group used its capital to expand a working capital intensive store network across the country, as well as to pay additional attention to marketing expenses to grow its customers.

D Mart, on the other hand, uses its capital to buy assets that set a strong momentum for future expansion, in contrast to the whole concept of the asset light model.

It is worth noting that the real estate market was in the dumps after the global financial crash of 2008-09. There was a 30-50% drop in prices.

visionary Radhakishan DamaniThe owner of D Mart seized the opportunity (contrary to the prevailing knowledge in the market at that time in favor of rented properties and not owned).

Cost-cutting and austerity were the obvious mantra at D Mart.

The contrast in operational metrics over the next 10 years after 2011 was staggering.

Inventory Turnover – The Most Important Metric in Retail

D Mart focused on inventory turnover (the higher the inventory turnover, the faster the goods move off the shelf). D Mart had an average inventory turnover of 16x while the inventory turnover at Big Bazaar stores was 4x. D Mart’s business model is focused on groceries while those in the larger market focus on clothing. This was one of the reasons for the higher inventory turnover as groceries grow faster than apparels.

rented vs owned properties

Future Group paid for the rent while D Mart owned the property (acquired at throwaway values ​​after the financial crisis) a major fixed cost savings when you own the properties.

debt vs surplus cash – Give debt to the demon who can sink your business into collapse

Future Group used debt for expansion while D Mart had surplus cash. actually D Mart was a debt free company throughout and has always expanded from internal accruals.

Ambience vs No Frills Store

Future Group invested in the store environment while D Mart had stores with basic air conditioning. The huge cost savings enabled D Mart to reach out to its customers in the form of ‘Lower Price Every Day’ schemes. This resulted in increased customer loyalty as most of D Mart’s customers are price sensitive.

The catch was that D Mart was offering the best prices and still making money, while Future Group entered a price war at the expense of its P&L and balance sheets to gain market share.

Interestingly, as things took shape, D Mart pressed the accelerator and launched 190 stores from 2011-2020, while Big Bazaar could open only 50 stores.

Only when the model was complete did D Mart move to the next level of development.

In the end, the tortoise was nearing the finish line, while the hare burned all its energy.

As of the present day, the market capitalization of D Mart is 2.4 trillion while Future Group lost the plot due to excessive debt and had to sell to Reliance.

While many people, including myself, would not agree with D Mart’s assessment, what I’m trying to say here is different.

Mr. Radhakishan Damani of D-Mart and Mr. Kishore Biyani of Future Group are both highly ambitious entrepreneurs, though one failed and lost his kingdom while the other is scaling new heights.

I think the success of D Mart and the failure of Big Bazaar can be attributed to ‘management focus’ among many things.

In a bull market, analysts chase growth and assign high multipliers to such companies, it is slow and steady but solid companies like D Mart, Big Bazaar (Future Group), Pidilite, which are wealth creators.

I think the deciding factor between D Mart and Big Bazaar was ‘frugality’.

It is the vision and belief system of the promoter that governs the way the company conducts business.

Difference Because Infosys excelled during the tenure of Mr. Narayana Murthy and other co-founders but hit a tough patch under Mr. Vishal Sikka, again there was a gap in vision and belief system.

As an analyst who tracks the small and midcap space, what separates potential wealth creators from wealth destroyers is management quality.

What are the criteria for management quality readers to pay attention to?

In an upcycle, when risks are rarely overlooked, management often goes into overdrive mode and takes on debt. It is fair to draw a line between ambition and irrationality. Debt is poison in a recession. That’s exactly what happened with the future group.

In an upcycle, there is a need to track the merger and acquisition activity of the company. Companies typically begin to acquire other companies (sometimes at irrational valuations and equal to their size). In a recession, all this causes danger. A classic example is pharma major Lupine, which acquired Gavis in 2017 for US$880 million during the peak of the pharma cycle, although the downturn caused the acquisition to stop altogether.

Working capital is an important lever for margins for most industries. A 15-20 day volatility in working capital can boost margins exponentially. Working capital is the oxygen for the company. Apart from high debt at Future Group, one reason was the sharp increase in working capital.

Therefore, as in the fable, the tortoise may outperform the rabbits in the stock market as well. So keep an eye out for the corporate turtles who are slowly but steadily moving towards the finishing line.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

(This article is syndicated from) equitymaster.com,

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