Can D-Mart modify its ownership model?

Euphoria around the Avenue Supermarts (D-Mart) initial public offering (IPO) of equity that saw 104 times more demand than the shares on offer might have overlooked a critical factor in the company’s growth so far. Namely, the predominant ownership model for its stores.

The company had rapid growth in recent years, with 112 stores as of September 2016, from one in 2002. Though rapid, the net profit grew to Rs 321 crore in 2015-16 from Rs 60 crore in 2011-12, a compounded annual rate of 51.8 per cent. This, however, has been largely dependent on the predominant ownership model it chose. Including long-term lease arrangements, where the period is more than 30 years and the building is owned by the company. This is different from the rental model its peers, including Future Retail and Reliance Retail, chose. 

"Retail is a low-margin business. So, it is very important to not only keep the cost low but predictable," says Pinakiranjan Mishra, partner and sector leader at consutancy EY. 

Many of the successful retailers of the world have chosen the ownership model. US-based Wal-Mart, Dutch retail chain Ikea and American fast food chain McDonald’s have thrived on it. Many Indian retailers have, however, chosen a rental model due to the high real estate cost in India. However, when rental cost became unviable, they needed to relocate the stores, which meant a decline in same-store sales (SSS) growth. 

"It is also a location-sensitive business. Global retailers sometimes own their stores and, in some cases, even the entire mall, to create value for the retail destination, save cost and ensure predictability of cost," says Mishra. Read More