Amazon, Flipkart intensify competition in grocery segment - Will Radhakishan Damani’s Avenue Supermart make a mark?
Currently, DMart has over 150 Dmart Ready pick-up points (PUPs) in Mumbai, Navi Mumbai and Thane areas, up from 75 PUPs a year back.
There is intense competition among renowned online players in the grocery market segment, which as per analysts have impacted Avenue Supermart as there has been dilution in its retail chain Dmart’s lowest product price proposition. Data cited by Kotak Institutional Equities revealed that, in October 2018, Dmart had the lowest priced product in 21 of 30 products we tracked, while in March 2019 this count shrank to 12 of the same 30 products. Further, competition seems to be fairly broad-based: Flipkart, Easyday and Amazon are aggressive in the food and grocery segment, while BigBasket is aggressive in the HPC segment. Online platforms have gained popularity, as anything can be ordered in just clicks anywhere. You do not even need to visit a shop to buy groceries, you can just order it by making payment online or even cash on home delivery.
Garima Mishra analysts at Kotak Institutional Equities stated that Radhakishan Damani’s DMart has traditionally had a strong private label offering in the food+grocery and home furnishing segment. It has now introduced its ‘Reflect’ brand of kitchen cleaning products, highlighted prominently as newly launched products within stores, and priced 30-50% cheaper than the competing brand.
Mishra added, “ We believe more such products may be in the pipeline, though wresting meaningful share from more established FMCG brands will take a long time.”
Currently, DMart has over 150 Dmart Ready pick-up points (PUPs) in Mumbai, Navi Mumbai and Thane areas, up from 75 PUPs a year back. Mishra says, “These stores geographically cover almost all regions from Mumbai, though Dmart may continue to make this network denser. Further, instead of acting as only PUPs, these stores have begun selling small-ticket kitchenware items. We believe the company will continue to expand the ‘Ready’ offering, though we expect a more big-bang expansion only once the business model stabilizes in Mumbai.”
Hence, Mishra believes the Street’s margin improvement expectation may not be met as Dmart will remain focused on boosting sales and will pass on most margin benefits (pricing benefits from suppliers) to customers in its bid to retain its position of being the lowest price retailer.
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She added, “ We think positives of the business model such as low price and localized offering are in the stock price, though negatives in the form of increased competition from online players is not. Roll-forward leads to a new fair value of Rs945 (Rs915 earlier). Reiterate SELL.”
On Tuesday, the share price of Avenue Supermart finished at Rs 1,492.30 per piece down by Rs 1.160 or 0.11%. However, the stock has touched an intraday high and low of Rs 1,505 per piece and Rs 1,483.60 per piece in the same day.
If Kotak’s target price does come true ahead, this would severely impact investors as ASL’s drop would be massive nearly 37% in future. Hence, all eyes have now shifted to Damani who can create the impossible with his DMart who has already given sleepless nights to listed peers.