Do you go to a supermarket or opt for Blinkit, Instamart or Zepto for your monthly groceries, daily vegetables or last minute coriander needs? Most millennials and GenZ, especially in metro cities, might choose the latter. Probably, because 10-15 minute home deliveries, discounts, and each to its own kind of convenience that quick commerce platforms offer.
But, DMart parent Avenue Supermarts that operates a chain of supermarkets and hypermarkets is facing tough competition, which has now started to reflect in the retailer’s quarterly results.
Following Q2 results over the weekend on October 12, Avenue Supermarts shares declined more than 9% during the trading session of October 14, despite an overall positive sentiment in the market.
The company’s market capitalisation (mcap) fell by ₹27,900.18 crore to ₹2,69,637.75 crore on the BSE. The downtrend in the retailer’s stock comes as the July to September quarter results missed analysts’ expectations on both the top-line and margins front.
What led to the Q2 miss?
Neville Noronha, CEO & Managing Director, Avenue Supermarts, said that growth of online grocery formats is affecting the company’s performance in large metro stores.
“We clearly see the impact of online grocery formats including DMart Ready in large metro DMart stores which operate at a very high turnover per square feet of revenue. DMart Ready business grew by 21.8% in H1 FY 2025,” he said in the Q2 results statements.
Morgan Stanley, which has downgraded Avenue Supermarts to ‘underweight’, noted that the DMart management didn’t view the rise of quick commerce as much of an issue a couple of months ago.
Brick and mortar businesses struggle
“We believe aggressive scaling strategies from Quick Commerce (QC) players (with greater numbers of product offerings and rising AOVs) are hurting brick and mortar businesses, implying further deterioration in operational metrics could be coming up,” the brokerage said in its latest note.
JPMorgan also highlighted that contrary to the company’s narrative two months ago where management had mentioned marginal impact on growth for stores where quick commerce has scaled up, the press release this time noted clear impact of online grocery formats including DMART Ready in large metro DMART stores which operate at very high throughput.
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“We did not like DMart’s comment of seeing an impact of online grocery formats (including quick commerce in our view) on few large metro DMart stores, which operate at a high sales/sq ft,” said Macquarie.
In fact, JPMorgan was “surprised” by the extent of same-store sales growth (SSSG) moderation, driving the brokerage to lower its SSSG/revenue forecasts by 4-6% over FY25-26E, which further led to reduction in margin and earnings (FY25/26E EBITDA cut by 8%/10%).
Slow response to market changes can lead to lag in growth, says experts
According to MS, which defended the firm’s business model for a while, believes that its slow response to steadfast market changes toward convenience is starting to hurt the business. Slower store expansion is exaggerating the impact on growth.
Macquarie, in its report, clearly stated, “we did not like the steady moderation in same-store sales growth (SSSG) performance in 2Q, nor did we like DMart’s comment suggesting a sharper impact from online grocery players on performance of at some large metro stores.”
DMart’s comment suggests that the impact of quick commerce/ other online grocery formats is higher than what the brokerage earlier envisaged, and it raises growth concerns, it added.
Defenders can’t remain defenders
Morgan Stanley reports explains that quick commerce players continue to expand their markets and stock keeping unit (SKU) coverage, expand categories, and increase average order values (AOVs) and discounts.
While DMart continues to offer lower prices versus peers, its slower growth rate can be attributed to being more defensive across a large part of their business — its store expansion growth has slowed year after year, and thus GMA share is lower than in the past, DMart Ready remains a work in progress, MiniMax is still in the experimental stage, and private brands are still not relevant, as per management.
MS also believes that the management commentary about competition from online grocery formats affecting like-for-like growth puts doubt on the 20% top-line growth algorithm for the business, which could lead to further de-rating.
What does DMart need to do?
JPMorgan, which also downgraded Dmart to ‘neutral’, expects DMart to increasingly shift its store addition mix towards smaller cities (10 out of 16 stores opened so far in FY25 were in non-metro cities.
“At this stage, we believe an aggressive review of the business model is required. We lower our F25-F27 top-line growth estimates to 17-18% (from 23-24%), vs. 19% in F24 and average of 31% over F16-F20,” Morgan Stanley asserted.
Meanwhile, JPMorgan believes there is growing confidence in e-commerce within its network. “DMART Ready is ramping up with improving delivery metrics (aspiring for 100% delivery under 12 hours vs 40- 45% now), tech investments, SOP and delivery infrastructure (opening more fulfilment centres to lower delivery time). H1FY25 revenue +22% y/y and is now present in 24 cities.”
Dmart valuation under pressure
Even as JPMorgan expects DMART to print mid-teens revenue/earnings growth, stock valuations will remain under pressure until sustained uptick in comps emerge and/or pace of store additions improves.
“QC impact has been higher than anticipated in Q2 and expanding scale for QC may continue to weigh on stock performance despite recent correction.”
Morgan Stanley noted that the stock has underperformed recently, which its expects will continue. Avenue Supermarts stock has corrected notably in the past 8-10 days post its weak quarterly update. It is down 14% in the past month and is the worst-performing discretionary and retail stock under MS’ coverage over the past one and three months.
The stock has given up a large part of its YTD gains and is now up 12% in 2024, vs. 13% for the Sensex.
The brokerage highlighted that Avenue Supermart currently trades at 79.2X and the consensus 12-month forward P/E multiple, slightly below its 1-year average of 82.2X.
MS believes concerns around the structural nature of this slowing growth could de-rate the stock further. Moreover, based on current estimates, consensus is building in 20-21% top-line growth for the next three years along with margin improvement.
“We expect consensus expectations to decline following the weak 2Q performance and commentary,” it said.
Quick boom commerce concerns
While DMart Q2 results offer a tangible reality check, the concerns regarding the boom of quick commerce platforms, not just traditional detailers but also the government, have emerged in the past few months.
The rapid expansion of quick commerce platforms such as Blinkit, Zepto, and Swiggy Instamart has raised significant competition concerns within the Consumer Affairs Ministry. Sources had in September told CNBC-TV18 that the ministry is reportedly worried about the potential impact these platforms could have on small businesses and local kirana stores, which are vital to neighbourhood commerce in India.
They said that the ministry voiced these concerns to the Ministry of Corporate Affairs (MCA), emphasising fears that aggressive discounting and the proliferation of “dark stores” run by these quick commerce platforms might disrupt the competitive balance. The Ministry is concerned that these practices could create an uneven playing field, threatening the survival of smaller retailers who struggle to compete with the financial and logistical advantages of these tech-driven companies.
In fact, while modern supermarkets like D-Mart feel pressure from quick commerce platforms, kirana stores may feel the pinch the hardest. These small, neighbourhood grocery shops, once the cornerstone of India’s retail landscape, are losing ground as more consumers turn to the convenience of online platforms. Though modern supermarkets still offer a value proposition in terms of store experience and variety, the competition from quick commerce apps is becoming more pronounced.