D-Mart’s Success Is Built On Drucker’s Truth: Profits Lie Outside An Enterprise

Supermarket chain D-Mart, which more than doubled in value on the day it was listed, making its owner Radhakishan Damani a billionaire many times over, is testimony to Peter Drucker’s pithy observation, that all results (ie, profits) lie outside the company. Inside a company, there are only efforts and costs. He said: “It is always somebody outside (the customer) who decides whether the efforts become economic results or whether they become so much waste and scrap.”

If many of today’s online and offline startups are beginning to fail, it is because they tried to attract a customer to their business instead of trying to build their business around the job the customer wants done. Customers don’t buy a product; they want a job done, and they tend to buy products that get their jobs done, says Clayton Christensen, professor of business administration at Harvard Business School.

You can cut costs, pare overheads to the bone, develop smart strategy, design good-looking products and employ the best talent, but results depend on whether the customer finds value in all this and your product gets something she wants at a reasonable cost. That, in essence, is the reason for Damani’s success with D-Mart, which has 118 supermarket stores generating over Rs 8,600 crore in revenues and Rs 320 crore in net profits. Profits have outpaced the growth in revenues, and this is one reason investors can’t get enough of D-Mart shares, which were issued to them at Rs 299 apiece during the recent initial public offer (IPO), but now quotes at Rs 650 (mid-morning, 22 March). At a market valuation of over Rs 40,000 crore, its valuation is more than the rest of the retailers put together. (This Times of India story offers good insights on the D-Mart success formula.)

A modest, media-shy businessman, Damani and his top managers focus on delivering the job many customers want done – their regular shopping, but with a dash of aspiration thrown in. The watchwords are affordability, convenience and moderate aspiration. Damani & Co created an enterprise focused on delivering this composite value. That it involved always pricing products below maximum retail price, keeping overheads low, going for cheap long-term lease rentals in the suburbs, and maintaining slim inventories always only goes to prove the Drucker dictum: it is the organisation that must try to adapt to the customer and not the other way around. Trying to mould the customer to what the organisation is geared to deliver through over-the-top marketing or advertising messages is ultimately a loser. To date, D-Mart’s customer base has largely been built by word-of-mouth and customer experience, not advertising.

To find this kind of price-sensitive customer who stays loyal despite the attractions of more glitzy and glamorous malls, D-Mart chooses its locations carefully – in cheaper suburbs, not at city centres. Where other retailers paid high rentals to be where they thought the footfalls were, D-Mart decides locations based on its customer demographic. Footfalls often don’t add up to customers. You will not find a D-Mart in the toniest localities of metros, or even in pricey suburbs.

By focusing on fewer product categories, it has chosen simplicity over complexity and excess choice. Damani lives up to the paradox that less is indeed more. It delivers greater turnover on a lower square footage than most other retailers.

What D-Mart proves is that business models for successful companies must be built around what a customer will pay for. You have to think outside in, not inside out. For, the results lie outside.