Quick commerce is coming for DMart’s turf

Avenue Supermarts Ltd, the operator of the DMart supermarket chain of stores, saw its challenges mount in the March quarter (Q4FY25), resulting in worsening pressure on operating profit margin. In the last quarter, the grocery retailer contended with heightened competition in the fast-moving consumer goods (FMCG) space, which eroded its gross margin; a surge in entry-level wages driven by a skilled labour shortage; and ongoing investments to enhance service levels.

Put together, these factors dragged down Avenue’s standalone Ebitda margin to 6.8%, the lowest in the past ten quarters at least. The metric was down 80 basis points (bps) year-on-year in Q4, versus 53bps and 27bps drop in Q3 and Q2, respectively. (100 basis points equals 1%.)

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Gross margin fell 24bps in Q4FY25 to 13.5% owing to lower share of high margin general merchandise and apparel (GM&A). The pressure on margins is expected to continue as competition intensifies, particularly from quick-commerce players. Avenue anticipates that gross margins in mature metro towns will remain subdued for some time.

While there is scope for acceleration in store expansion, profitability/margins remain at risk due to increasing competitive intensity from other large format stores and quick commerce players; and higher operating cost, pointed out a Citi Research report dated 4 May. “Ebitda/PBT growth has lagged revenue growth in 10 of last 11 quarters,” said the report.

Year-on-year Ebitda growth in Q4FY25 was 4.4%, but revenue growth was far better at 16.7%, a figure that was already disclosed in an update last month. Store additions helped revenue growth. Plus, like-for-like growth for stores that are two years or older stood at 8.1%, mainly aided by higher footfalls. The company added 28 stores in Q4, bringing the total to 415 as of the quarter's end.

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Overall, the company said it is doing far better in non-metro towns even as business is resilient in metros with relatively better like-for-like growth. A key moniterable ahead is improvement in contribution of GM&A sales from 22.2% in FY25.

CEO designate Anshul Asawa is expected to take charge of all operational aspects of the retail business in 4-5 months. Avenue’s shares are up about 13% so far in 2025, but down 13% over the past one year. 

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Sure, store additions can boost revenue growth, but navigating a tough competitive environment will be challenging for Avenue Supermarts, curbing margin and earnings growth. This would keep sentiments muted for the stock that trades at a pricey 61 times estimated earnings for FY27, based on Bloomberg data.