Daybreak - Dmart and Zudio walked so Vishal Mega Mart could run

Episode Date: December 23, 2024

No one was surprised by Vishal Mega Mart’s stellar market debut last week. After all, institutional and retail investors oversubscribed 27X to the Rs 8,000 crore IPO. So when it listed at a considerable premium, most people saw it coming. But, how did the 23-year-old value retailer get to this point? Well, in the last few years, Vishal, which has 70 per cent of its stores in tier 2 and smaller cities, has managed to outpace its rivals in the same space, such as Vmart and V2 Retail. Today, it pegs itself in the same league as Dmart and Trent, despite the fact that the retailer is still much smaller in scale. But this comparison has given Vishal a compelling story to tell about itself. In this episode, we delve into Vishal Mega Mart’s current position in India’s retail landscape. Tune in. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. No one was surprised by Vishal Megamart's stellar market debut last week.

Most people who tracked the capital markets saw it coming. After all, its 8,000 crore IPO was always. oversubscribed by 27 times. So it was expected to list with a considerable premium and well, it did. But how did it get here? You see, for a long time, Vichal's primary competitors were believed to be the regional players, the likes of Vmart, V2 retail and style bazaar. That's because much like these players, Vishal was catering to smaller cities and towns across the country.

In fact, three out of four of its stores are still located. in smaller cities. But over the last few years, it has managed to leapfrog most of its regional rivals. The numbers speak for themselves. In FY24, the company's sales managed to hit close to $9,000 crore rupees. The regional players we spoke about, meanwhile, reported sales between 1,000 and 2,000 crore rupees.

And that's exactly why Vishal has been able to convince some analysts and investors to mention it in the same breadth as two of the Pills. biggest value retailers in the country. I'm talking about DMART and trend subsidiary Zudio. Now, these two retailers are considered the gold standard for running efficient and profitable retail businesses. And while Vishal Megamart has established itself as a large player in terms of scale, it hasn't quite reached that level yet.

For context, DMAT sales were five times higher in FY24, while trends were also considerably higher at about 12. $12,000 crore rupees. In addition to that, Vishal Megamart's core market is also considerably different. So while Vishal caters to smaller cities, both Trent and D-Mart primarily

focus on Tier 1 cities. Which is why, on the surface of things, Vishal seems to have far more in common with those other regional players. So why then would it want to put itself next to D-Mart and Trent? Well, unsurprisingly, it's to give its private equity

investors a leg up. In fact, Gunendir Kapoor, Vishal Megamath CEO, had said earlier just that, remember, this is a largely PE-owned company and the investor has been invested for six years. So this is essentially a dilution of their stake and an effort to make it a publicly listed company. So from investors, an IPO is a golden ticket. We have seen that to be the case. with other retailers as well. Consider their peers like we do retail, style bazaar, for example.

That was the Ken reporter Akriti Bhala. You see, the comparison to D-Mart and Trent, the two big dogs of the retail space, has given Vishal a very compelling story to tell about itself. And in this episode, we are going to decode that story. We are going to delve further into

Vishal Megamart's current position in India's retail landscape. And we're also going to talk about how it got here. Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahal Philipos, and I'll be joining my colleagues Nikita Sharma every day of the week to bring you one business story that is worth understanding and worth your time. Today is Tuesday, the 24th of December.

Vishal Megamart's IPO could not have come at a better time. The retail sector is booming, all thanks to the budget-conscious shopper, and this particular retailer prides itself on being a haven for all bargain hunters. Akrithy actually paid a visit to one of Vishal Megamart's outlets in Delhi a little while ago. And as soon as she entered, she was greeted by a visual overload of products. They were literally crammed into every visible nook and cranny. Groceries, apparel, personal care items, infant supplies, kitchenware. Anything that an Indian household would require, you will find at one of their stores.

But Akrity found that there is a method to this madness. You see, across its stores, the 23-year-old retail chain, follows a consistent layout. On the ground floor, you will have all the high margin apparel. And then on the first floor is the general merchandise like kitchen appliances, until finally you arrive on the second floor, where you will find all the low margin FMCG products. Now, this is also indicative of the company's larger strategy, the strategy of making FMCG

products a quarter of its portfolio. In fact, that's exactly what helped drive monthly repeat visits. It's also what has helped fuel one of the good. fastest sales growths in this sector, second only to Trent. Currently, Vishal is at par with market leader Demart in that department. What sets Vishal apart further is its dependence on private label products across categories. Now, that's what keeps costs down and margins up. For context, over 70% of the products you will find at Vishal Megamart come from third-party

manufacturers. So, for instance, they will source apparel from players like Risha Boswal or something like consumables from a player like Bikunairwala foods. If you look at the sales mix, apparel accounts for about half, while general merchandise and FMCG each contribute around 25%. Now, this whole strategy combined with the sheer breadth of products on offer, all at incredibly low prices, of course, has allowed Vishal to outperform other regional retailers like Vmart.

In fact, like one retail analyst pointed out to Akrithi, Vishal has managed to effectively bridge the gap between larger Pan-India, retailers and regional players. It's now right in between. It ranks higher among value-focused competitors, but is still trailing behind in premium or urban-centric market dominance. That's also clear from the numbers. Despite a 30% sales growth in the last two years, Vishal's sales are still much lower than both Demart and Trent. And now it also doesn't help that competition will only get fiercer, especially since Tata and Reliance are very quickly making their way into smaller towns. More on that in the next segment.

Vishal Megamart's huge success in the small town retail battle has a lot to do with the success of Zudio. Allow me to explain. Earlier, customers were concerned about status symbols. So they would usually go to stores like lifestyle or pantaloons until Zudio enter the picture. You see, Zudio managed to break that notion that fashion has to be accepted. And what also ended up happening because of that change in behaviour was that the same customer now doesn't shy away from entering a Vishal Megamart outlet. Today, aspirational retail accounts for 90 to 95% of the total retail market. Analysts expect that the current market, with about 8 to 10 value retailers, will eventually consolidate to just 4 to 5 players in the coming years.

Here, Trent leads the majority of retailers in terms of profitability. In terms of ebita margins, it is way ahead of other diversified retailers, Vishal Megamart included. To keep up, Vishal has had to tweak its strategy a fair bit, starting with shifting its focus from mostly apparel. Much like its counterparts, it has pivoted to categories like home furnishings, staples and appliances. And its CEO, Gunendar Kapoor, is the brains behind the switch. He has been with the companies since 2011, when private equity firm TPG Capital, and Indian conglomerate Chiram Group took over from the company's founder, Ram Chandra Agarwal.

Seven years later, it was sold to Kedara Capital and Partners Group. Kapoor remained CEO. In fact, he is an investor CEO. He holds about 2% of the company. Anyway, the point is that he had a big role to play in making FMCG a core part of Vishal Megamart's business. And it was a strategy that really worked because it encouraged customers to return every month

to purchase their essentials. And every time they would come, they would also end up adding higher margin items like apparel to their baskets. That's also where the distinction between small and large retailers lie. You see, most value retailers with a large regional presence, the likes of Vmart or V2 retail, still have apparel as the biggest chunk of their business. Meanwhile, if you look at national retailers like Dmart, they rely far more on FMC to bring in business. And Vishal Megamart seems to be going in that direction. But the thing is, it is very hard to keep up.

The retail landscape is evolving constantly. And it also doesn't help that value retail now has another massive challenger, quick commerce. Now, Vishal has clearly recognized this, which is why it recently started offering home deliveries within 2 to 4 hours. But like most analysts pointed out, there's a huge gap between 10 minutes and 4 hours. But it makes sense that Vishal would introduce something like that, Considering that smaller cities and towns are very quickly getting used to quicker impulse-driven purchases,

once that consumer behavior becomes even more widespread, it's likely to transform the whole market. But does that mean that the value retail market is going to disappear or become irrelevant? Probably not. Because at the end of the day, in a price-sensitive market like India, as long as Vishal is able to offer a great deal, it will always manage to get customers through the door. break is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras.

Head to the Ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippo's and edited by Rajiv Sien.