Event update: Avenue Supermart (Unrated) - Conservatism giving way to dynamism…

We attended Avenue Supermart’s analyst meet and were impressed by its obsession of providing ‘everyday low prices’ to its consumers. Management was happy with its SSG performance of 17.8% for FY19 but was displeased with just 21 store additions last fiscal; it is hopeful of an acceleration in store additions (on a rolling basis) but within their conservative framework. Competitive intensity (discounting) has increased dramatically in the past 12-18 months but Avenue continues to provide the best value to its consumers (albeit value proposition vs competition has narrowed) enabled by its lowest cost operator model. The market is large for everyone to co-exist and Avenue continues to test its e-commerce model as it does not want to miss out on channels of the future. Avenue continues to execute as per its seemingly flawless plan and trades at 30.5x FY21 EV/consensus EBITDA, we do not have a rating on the stock. Key risk is any major transformation in the general trade retailer model (being tried by some start-ups and also Reliance Industries).

Extreme conservatism to conscious aggression: Management indicated that they have been extremely conservative in their approach in adding stores as their model required buying land; however, they have beefed up their real estate team to enable a bigger funnel of new store openings and are also open to the long-lease model. New stores are also larger in size (~50K sqft vs existing company average of ~30K sqft). Their conscious aggressive approach is also visible in their calibrated entry in e-commerce (DMart Ready) and their plans on cash & carry (which is under wraps currently).

Competitive intensity is very high but enough room for everyone: Discounting levels have increased in the past 12-18 months led by other modern trade players and e-commerce. Avenue’s value proposition for the consumer is intact; however, gap with the competition has reduced. This led to Avenue investing more in improving the price value equation for the consumer which impacted gross margins (fell by 90bps in FY19 to 15%). Management believes that the pie is just too large for everyone to coexist and in brick & mortar there is no market globally which has exuded ‘winner takes all’ properties. Management reiterated that revenue growth is the key focus area and was non-committal on margins.

Nascent e-commerce play: With its ‘DMart Ready’ play, Avenue is testing its e-commerce model. As of now it offers a very small assortment of FMCG products on its app (versus its stores) and also charges for delivery. Avenue is focusing on getting the technology platform right and making it scalable. The e-commerce shopper is convenience seeker while DMart’s core consumer is value seeker and the trick is to blend the two, the model for which will evolve over time.