Avenue Supermarts Ltd., parent of retail chain D-Mart, will continue to focus on profits at individual stores and expanding in existing markets, Neville Noronha, managing director and chief executive officer, told BloombergQuint.
The company’s shares ended almost unmoved on Wednesday, a day after the stock more than doubled on listing. Noronha said D-Mart will remain conservative even as the world talks of “speed, burn rates, profit will come later”. Excerpts from the interview…
Which are the new geographies that D-Mart is looking to expand in?
We said in our investor conference that 70-75 percent of our investments will be in our existing markets (of Gujarat, Maharashtra, Karnataka, Andhra Pradesh and Telangana) because we understand them better. National Capital Region, Rajasthan, Madhya Pradesh and Chhattisgarh are new markets for us.
Will the speed of expansion increase now?
If you see the capital raised through the IPO, bulk of it is to retire debt. Our last year’s capex addition was higher than the money raised for capex as some component is land and IPO proceeds cannot be used to buy land. So we don’t look at the IPO from an accelerated capex opportunity perspective. We invest only if a particular region or location makes sense from a medium to long term ROIC (return on invested capital) perspective. And we don’t believe in giving projections.
What is important is running the business well. Retail is not a ‘fastest finger first’ business. It’s not a business where the guy who captures the market first is going to get it all. There is opportunity for multiple players, not like the tech space where the winner takes it all. In a country like India which is so diverse in taste, food habits and culture it is impossible, there is space for everybody.
How many stores do you plan to add by the end of the year?
It is impossible to answer that. The model that we have (of owning stores) is also a risk for the business. We buy land, we build stores. It is impossible to predict when that store will really come up. The time from acquiring (land) to conversion (into a running store) is long. Unlike a typical lease where all the risk is taken by the landlord – everything is ready, all permissions are in place. You go in, put up all your furniture and fixtures and inventory and the store is up. That is not the case with us. Our larger priority is to focus on the business and run it well.
If you take Mr Damani’s beginning in retail which was 1998 , in the first 10 years we had just 10 stores. The whole philosophy is to get the model right. Growth or store additions can be thought about later. There have been certain years when we didn’t open a store.
How do you measure performance internally?
Return on capital employed at the store level, that’s it. We make an investment and focus on hitting a 10 percent ROIC in two years. More or less, we have hit that number. Once the store hits 15 percent ROIC, we stop looking at the ROIC numbers. If the store keeps growing at a reasonable rate, the ROIC has a multiplier effect.
At times, some quarters are poor for old stores. There is no growth or very low single digit growth. We are not worried because the store is delivering terrific ROIC. All challenges are around the physical infrastructure. We just need to open another store in the vicinity to get growth. To that extent, a brick and mortar store has physical limitations in terms of how much it can grow.
D-Mart offers ‘everyday low prices’. How do you decide prices compared to what your rivals offer?
We don’t track competition. We have our own metrics, a particular cost at which we buy and a certain mark-up. I don’t have the data to tell you D-Mart’s prices are so much cheaper than rivals. It is very hard to track that as the dynamics keep changing. But like I said, models will evolve and multiple segmentation will emerge. These are exciting times for brick and mortar retail.
You own your stores. What about leasing?
We like to own because it creates a sense of permanence, but we are not averse to leasing. In certain markets, there is no option to buy and there are options to lease, which makes a lot of financial sense. But given an option between a lease and buying, I would like to buy.
How have you managed your inventory?
Our business model is not to have more than 30 days of inventory.
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