V-Mart Retail Ltd.
Anish Jobalia ] 19th August 2017
V-Mart is a value fashion retailer focused on
Tier-2 and Tier-3 cities primarily focused in
the states of UP and Bihar. The company has
~150 stores and operates in a clustered
manner. Every new store that gets added is
~100 kms away from an existing store. The
company opens up a store in regions where
there is not organized fashion store, but where
there is an existence of an unorganized market.
The company tries to capture market share
from these local markets by providing an
environment of comfortable shopping and an
anonymous atmosphere to the customers. The
customers are more prone to being abused by
the shopkeepers in the local markets if they
walk away from the shop without buying
anything. However, that would never happen
in a V-Mart store because of the professional
approach inculcated within the store. At the
same time, the customer gets a lot of options to
try and choose from, without any obligation to
buy.
V-Mart was founded by Mr Lalit Agarwal,
who is currently both the chairman and the
CEO of V-Mart. V-Mart was founded in 2003
by Mr Lalit Agarwal. V-Mart has an average
retail space of ~8000 sq ft per store and
generates ~10,000 per sq ft with an average
footfall of ~450 customers per day, conversion
rate of ~65% and average billing size of ~620
per cash billing memo. V-Marts unique selling
proposition lies in its ability to give affordable
fashion at a lower price as compared to
competitors. This competitive advantage
comes from V-Marts ability to source bulk
merchandise from vast number of vendors
located across India. A smaller retailer does
not have the advantage of bulk sourcing and
hence lacks the bargaining power. V-Mart has
gained first-mover advantage over competitors
by venturing into Tier-2 and Tier-3 cities and
creating a mindshare among customers.
However, V-Mart faces competition from
emerging and established players like V-More,
One India Family Mart, Value Bazaar, Family
Bazaar, Vishal Megamart, V2 Retail, City
Kart, Kolkata Bazaar, Fashion at Big Bazaar,
Reliance Trends etc. This also indicates that
there are very low barriers to entry in the
business. Customers have the habit of
comparing prices across various stores and
will buy the product from the store where they
see the highest perceived value because the
customers are not only price sensitive but also
aspirational. A chat with few customers in the
Lucknow stores revealed that V-Mart has a
well established brand name and good range of
options at affordable price for their customers.
At the same time, a visit to one of the stores of
competitors like Vishal Megamart revealed a
lack of customer service and dilapidated
conditions of the store with the inventory lying
around in an untidy manner.
In my opinion, the real competition is from the company is currently trading at 40 x trailing
bigger players like Fashion at Big Bazaar and EPS because of the positive sentiments in the
Reliance Trends, where the service levels are retail sector, along with expectation of healthy
high and the inventory is kept in a better growth in EPS for FY18. V-Mart will be
manner than at V-Mart (Because of beneficiary of increase in discretionary
implementation of color blocking concept). In spending and the growth of organized retail.
order to increase customer loyalty, V-Mart is
trying to increase the contribution of sales A long term threat could be competition from
from private label brands like Flick, Spark, E-Commerce players, sine they will be able to
Cavana etc. At this point of time, there is no penetrate the Tier-2/Tier-3 cities much more
significant difference in the gross margins faster with the branded products because of
between private label and third party brands. their asset light model. However, the trend of
V-Mart is trying to gain further competitive going to a store and checking out the various
advantage over competitors by improving the options by checking yourself in the mirror
levels of customer service, investing in about how a particular combination appears is
backend processes and improving the not going to go away very soon. Its a habit.
bargaining power over suppliers by bulk
buying. One of the areas where V-Mart lags
bigger retailers like Fashion at Big Bazaar is
strong backend processes for inventory
management, the lack of implementation of
color blocking concept, lack of a dedicated
source of vendors.
V-Mart is focused on improving the working
capital turnover and has been able to execute
their strategy for doing the same. The
company level EBITDA margins of V-Mart is
~10% and will be able to sustain the same if
they are able to grow same store sales at the
level of inflation. Some of the factors which
could negatively affect same store sales
growth include Reduction in conversion rate,
reduction in footfalls per store due to
competition, not able to increase prices in line
with inflation of the inventory due to hyper-
competition in value format. Some of the
factors which could positively affect same
store sales growth include Increase in
average billing size due to increase in basket
size per customer, faster response from
management to disposing off old inventory
which could help in better utilization of space,
implementation of color blocking concept
across all stores to improve visual
merchandising, new customers, increase in
price of SKU in line with inflation, increase in
population of Tier-2/Tier-3 towns due to
increase in urbanization.
V-Mart has consciously implemented the
strategy of not targeting Tier-1 and Metro
cities due to higher rental costs and high
competition in the metro markets. At the same
time, the customers in metro markets are much
more brand conscious which V-Mart will not
be able to capture. V-Mart has one of the best
profitability in the retail industry and is free-
cashflow generating. The companys post tax
ROCE is ~20%. This is because V-mart has
got the business model right and has been able
to generate high sales per sq ft and tightly
managed working capital. The company has a
very low debt to equity and aims to grow the
number of stores from internal cash-flows. The