Big Bazaar v/s D Mart – What Investors Can Learn from this Hare & Tortoise Story

Future group launched its first Big Bazaar store in Hyderabad in 2001; while its competitor 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 at almost the same time.

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

Fast forward to 2011 (i.e. 10 years since the launch of their first store)

Big Bazaar grew to 250 stores while D Mart’s store count grew patiently to merely 10.

The interim verdict after 10 years of launch: Advantage Big Bazaar by a margin of 240 stores.

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

In the Tortoise and Hare tale, Big Bazaar, the hare, was clearly winning with D-Mart, the tortoise, nowhere close in the frame.

However, the real battle started post 2011…

Let us look at the expansion strategy for both the companies.

Future group used its capital in expanding a working capital intensive store network across the country along with added focus on marketing expenses to increase its footfalls.

D Mart on the other hand, contrary to the whole concept of asset light model, used its capital to buy properties which set up a strong pace for future expansion.

It is worthy to note that the real estate market post the global financial crash of 2008-09 was in the dumps. Prices had fallen by 30-50%.

The visionary Radhakishan Damani, owner of D Mart, seized this opportunity (contrary to market wisdom prevailing at that time in favour of rented properties and not owned).

Cost cutting and frugality was the clear mantra at D Mart.

The contrast in operational metrics over the next 10 years post 2011 was startling.

Inventory turnover – The most important metric in Retail

D Mart focused on inventory turnover (higher the inventory turnover, faster the goods move from the shelf).

The average inventory turnover of D Mart was 16x while the inventory turnover at Big Bazaar stores was 4x.

D Mart business model focused on groceries while the big bazaar guys focused on clothing. This was one of the reasons of higher inventory turnover as groceries move fast compared to apparels.

Rent v/s Owned Properties

Future group paid for rent while D Mart had owned properties (acquired at throw away values post the financial crisis)

A major fixed cost saving when you have owned properties.

Debt v/s Surplus Cash – Debt the demon which can drown your business in a downfall

Future group used Debt to expand while D Mart had surplus cash. In fact D Mart was a debt free company throughout and has always expanded from internal accruals.

Ambience v/s No Frills Store

Future group invested in store ambience while D Mart had stores with basic air conditioning. The massive cost savings enabled D Mart to pass it on to customers in the form of schemes like ‘Everyday Low Prices’. This resulted in customer loyalty as majority of D Mart customers are price sensitive.

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

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

Only when the model had been perfected, D Mart went for the next level of growth

Finally, the tortoise was nearing the finish line, while the Hare burnt all its energy.

As of current day, D Mart enjoys a market capitalization of ₹2.4 trillion while Future group on account of extremely high debt, lost the plot and had to be sold to Reliance.

While a lot of people including me will not agree with the valuation of D Mart, the point I am trying to make here is different.

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

The success of D Mart and the failure of Big Bazaar in my view can be attributed out of many things to ‘Management Focus’

While in a bull market, analysts chase growth and assign higher multiples to such companies, it is the slow and steady but solid companies like D Mart, Big Bazaar (Future Group), Pidilite to name a few who are wealth creators.

In my view the deciding factor between D Mart and Big Bazaar was ‘Frugality’.

It is the vision and the belief system of the promoter which governs the way a company does business.

The difference because Infosys excelled during Mr Narayana Murthy and other co founder’s tenure but hit a rough patch while Mr Vishal Sikka was at the helm, was again a difference in the vision and the belief system.

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

What are the parameters with respect to management quality readers should focus on?

In an upcycle, when risks are seldom ignored, managements often go in an overdrive mode and take on debt. It is pertinent to draw a line between ambition and irrationality.

Debt in a slowdown is poison. That is exactly what happened to future group.

In an upcycle, merger and acquisition activity of the company needs to be tracked. Companies normally start acquiring other companies (sometimes at irrational valuations and equal to their size). In a slowdown all this spells danger.

A classic example is pharma major Lupin which during the peak of the pharma cycle in 2017, acquired Gavis at US $880 m, however the slowdown led to the acquisition being completely written off.

Working capital for most of the industries is the key lever for margin. A 15-20 day movement in working capital can move margins sharply. Working capital is the oxygen for the company. One of the reasons apart from high debt in Future group, was sharp increase in working capital.

Therefore, as in the fable, tortoises can outperform the hares in the stock market as well. So do keep an eye out on corporate tortoises that are slowly but steadily moving towards the finishing line.

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

(This article is syndicated from Equitymaster.com)

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