DMart faces pressure from quick commerce as online grocery platforms challenge growth

Avenue Supermarkets, the operator of the DMart chain of stores, feels pressure from quick-commerce channels as consumers turn to convenience and instant gratification for their grocery needs. In its management commentary following its results on Saturday, the retailer admitted that sales at metro stores were impacted due to the online grocery channels.

The company’s shares fell as much as 9.5% intra-day on the BSEon Monday, the most since January 2019, after disclosing the online challenges. The stock finally settled at `4,184 apiece, down 8.48%.

Consolidated net profit came in below estimates at 660 crore for the three months ended September, while consolidated revenue increased by 14.4% y-o-y, touching 14,445 crore.

At least five brokerages, including names such as Morgan Stanley, Goldman Sachs and JP Morgan, downgraded their ratings on the stock, with some citing the firm’s business structure, which, while offering everyday low prices has failed to take into account newer forms of competition and purchase behaviour from online channels.

Ebitda margins of Avenue Supermarts in Q2FY25 were down marginally by 40 basis points to 7.6% versus 8% in the year-ago period. This came as employee costs were higher than expected as a result of DMart’s efforts to improve service levels and build capabilities for the future, analysts tracking the company said.

More importantly, DMart’s crucial same-store sales growth (SSG) slipped to levels of 5.5% in the September 2024 quarter (Q2FY25), lower than the 8.6% seen in the year-ago period and 9.1% reported in the June quarter, as the q-commerce challenge gets bigger by the day.

This comes as DMart’s metro stores, which typically record high turnovers due to its captive base of consumers, have seen a shift in buying to online platforms, analysts at brokerage Nuvama Institutional Equities said, as quick commerce growth has been the sharpest in the top 10-15 cities of India.

The revenue from sales per retail business area per sq ft, which is another metric to gauge turnover from stores, has remained flat versus last year at 8,582 in Q2FY25 compared to 8,542 in Q2FY24. It dipped marginally versus the June quarter at `8,648.

While Avenue Supermarts has an online offering called DMart Ready to counter online grocery platforms, experts say that its slower delivery timelines leave it vulnerable to quick commerce players, who promise delivery within 10 minutes.

Brokerage Bernstein believes that DMart can return to seeing 20% revenue growth on faster store roll-outs. The brokerage also believes that if the company pivots its area of focus for DMart Ready to 4-6-hour deliveries as opposed to next-day deliveries that could reduce the pressure on the retailer from online channels.

But for now, that seems unlikely as the retailer has indicated that its store launches will happen as per plan, with the bulk of store roll-outs expected in the second half of the year. In Q2, DMart opened six stores, as compared to nine in the same quarter of the previous year, taking the total store count to 377.

“DMart has a pattern of opening more stores in the second half than in the first half of the year. We are building in 45 stores for FY25, which seems achievable as per the commentary as well as the trailing 12 months’ running rate,” Nuvama Institutional Equities said on Monday.

In FY23 and FY24, DMart opened 40 and 41 stores each. It has indicated that it will keep this momentum going in FY25.

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