In enhancing the customer experience, DMart slips on the tight control it has on its operational costs, sustaining the lowest prices will be difficult.
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Aadit Palicha, co-founder of Zepto, the quick commerce unicorn with its sky-high valuation, made an interesting observation on DMart’s operating model on Nikhil Kamath’s YouTube podcast. Commenting on the experience of shopping at DMart’s brick-and-mortar stores, he said, “It’s a pain… it’s a fight. You stand in line; there is no proximity, you have to drive there, it is crowded, and the cashier might not be available…it is just not a good feeling. That’s basically the cost of getting products for cheap.”
The point holds merit, at least on the face of it. While the lowest prices are the key differentiator for DMart amongst competitors, as anyone who has shopped there would attest, its stores do not fare well on other aspects of the shopping experience. For instance, item selection is limited, the ambience is basic, and there is always a mad rush to get in and out of the store, even if it’s not peak time. It would be reasonable to assume that should a survey be done to rank supermarket chains on attributes that a customer looks for in their shopping decision, DMart would rank right on top on price but would find itself far lower on most other attributes.
For all the negatives, though, DMart seems to have done pretty well for itself and its shareholders—its supermarket business, started in 2007, has been consistently profitable for over a decade now, with year-on-year growth. Zepto, on the other hand, despite the high valuation, rapid growth, and tall claims, has seen losses exceeding Rs10 billion in FY23 and FY24, notwithstanding the sincere efforts of Palicha and his team to make convenience available to the consumer at a low price.
How has DMart succeeded despite having a less-than-optimum customer experience? How do they manage to post profits at a time when quick commerce firms, which easily overshadow them on digital access, the convenience of a quick delivery, and the comfort of ordering from home, incur losses year after year?
The answer lies in DMart’s obsessive focus on cost and its ability to understand its core customer base in and out. It knows the why part of the customer’s decision-making process that gets them to a DMart store in the first place. People shop at DMart because of its low prices. While they may also like a better environment or service, the trade-off between price and service matters. As long as the customer places a much higher value on the price benefit than other benefits, this single-minded devotion to price works for DMart.
If, in enhancing the customer experience, DMart slips on the tight control it has on its operational costs, sustaining the lowest prices will be difficult. A large part of its success results from a strong foundation of operational excellence, which it continues to strengthen. At DMart, cost savings are a part of every action, to the point that it is a part of the firm’s culture. Its marketing and other selling, general, and administrative (SG&A) expenses are among the lowest in the industry.
Also read: Zepto: The unicorn in the grey (funding) winter sky
Improving the store ambience and hiring more cashiers and staff will undoubtedly improve the overall customer experience. Still, it may be counterproductive if it raises costs to such an extent that DMart is forced to raise prices or forgo profits. If anything comes in the way of the lowest prices, DMart chooses not to pursue those actions.
Big Bazaar, which entered this space well before DMart, also focused on the lowest prices with its tagline ‘Isse Sasta Aur Accha Kahin Nahi’ (Nowhere will you find things cheaper and better than here). However, it went bankrupt in 2014 due to its inability to control costs.
While the customer looks for multiple benefits that shape their shopping experience, DMart focuses on the most important benefit while letting go of other benefits that may be ‘nice to have’ but are clearly not ‘necessary to have’ for its core customers. Two factors are important to remember here: One, as long as no one comes up with a viable business model offering added convenience at the lowest prices, DMart can afford to focus on its cost-based points of differentiation without worrying too much about parity with competition in other aspects. Two, as long as the core needs of its core customer base are driven by price benefits, it can get away with a less-than-optimum experience. The operative words being ‘as long as!’
This path is not without its pitfalls. With time, customers’ expectations evolve. What they consider good to have at some point may become a hygiene condition later. If competitors stick to either cost focus or differentiation, the dynamics continue to work for brands like DMart. But if any player innovates to break the price-value trade-off, offering the lowest prices with enhanced experience on some aspects, then DMart could be in trouble. There have been many instances of new entrants breaking the existing price-value trade-offs and redefining the value curves in their industry.
Ginger Hotels is a case in point, where hygiene levels and room quality were increased well beyond industry standards while keeping prices competitive for budget hotels. This was possible by focusing on elements like hygiene that were important for the customer and reducing or eliminating elements that were not so valued, such as concierge services or multiple restaurants.
While keeping laser sharp focus on customer needs is important, playing on one’s strengths is equally important. DMart’s core customer, the price-conscious shopper, also finds ordering from the comfort of home appealing. Realizing that entering the quick commerce race will mean higher costs and competing with firms with deeper pockets or better margins, it has desisted from entering this space. Instead, through a small footprint, DMart is currently focused on perfecting the operating model for its online delivery business. While having attempted a dual model of pickup stores and home delivery, it has now realized that it makes sense to run a lean operating model to offer the lowest prices like in the brick-and-mortar business. Thus, it recently announced the decision to shut down its pickup points and focus only on the home delivery component, a step towards sustainably fulfilling the demands of the core customer.
It is tempting to be everything customers desire, but strategy is about choices, and sometimes, letting go of some unimportant benefits is the better strategy. As Michael Porter points out in his seminal article, ‘What is Strategy? ‘The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy.’ Trying to be all things to all people is a recipe for failure.
For instance, JCPenney, the American retailer, learnt this lesson the hard way. When Ron Johnson was hired as the CEO in 2011, he tried to revolutionize the average JCPenney store—making it a more premium place to shop. After all, Johnson had been very successful in his previous stint with Apple, masterminding the upscale design and premium shopping experience that defined the tech giant’s stores. However, Johnson’s attempts to make JCPenney more upmarket with store-in-store boutiques and removal of coupons resulted in an utter disaster that also led to the CEO’s dismissal a mere 17 months after assuming the position. The share price dropped by half then, revenues decreased by $4.3 billion, and the firm incurred a $1 billion loss, as reported in chiefexecutive.net. Reason? Johnson’s approach of upscaling JCPenney stores alienated the average JCPenney customer looking for value deals and failed to appeal to the more upmarket segment. Ultimately, JCPenney was stuck in no man’s land, later filing for bankruptcy in 2020 during the Covid time.
What should a firm do, then? The answer is simple: identify your core customer and the key motivations driving their purchase preferences. Ultimately, it’s all about becoming irresistible to your core customers, such that, no matter where they search, your ability to offer the value they seek is unparalleled. Like the proverbial genie in the bottle, the marketer has to bow to the customer but can limit the number of wishes to be granted, provided the one most important wish is fulfilled in a difficult way for anyone else to match.
About the authors: Rohit Prabhudesai is an Associate Professor of Strategy and Consulting at the Goa Institute of Management, and Ruppal Walia Sharma is a Professor of Marketing at the S.P. Jain Institute of Management and Research (SPJIMR).
Views are personal.
[This article has been reproduced with permission from SP Jain Institute of Management & Research, Mumbai. Views expressed by authors are personal.]
