WWRR Vol.2.015

M
FOUNDATION
In addition, with the infinite game, retailers are thinking beyond
just ad spending for brand building: They are also offering a
number of consumer-centric services bundled with the core retail
function to improve engagement, loyalty and consequent retention.
We call it the 'stack model': Each stack or bundle brings new customers
into the ecosystem and offers solutions for existing consumers,
thereby increasing their engagement in the ecosystem. This
includes messenger apps, membership models, financial services,
digital content, exclusive entertainment, gaming, virtual reality, etc.
l Apparel will be driven by a wide assortment that closely follows
global fashion trends.
Online penetration in these segments can trend towards 30% and
will be the key growth driver for the next few years.
Development of online grocery however, will likely be different in
each country and depend on factors like basket size, urban density,
independent grocer culture, broadband/smartphone penetration,
infrastructure. urban driving infrastructure, etc.
We do not profess to foresee the full extent of the evolution of the
stack model in India. Yet we do believe that companies focusing on
the retail stack with value as the only differentiator will find customer
acquisition and retention an uphill battle.
...but the key debate is on the channel –
will India skip physical retail in favor of
eCommerce?
In the battle of online and offline, we think grocery is the
silver lining that can help brick and mortar retailers keep
a hold of overall retail market share in the future. They
have a strong starting point – a base of city-centric assets
to leverage and the benefit of grocery shopping being a
weekly occurrence vs. markedly lower frequency of
electronics or apparel shopping.
Various factors favor a decentralized eCommerce model
(store-based fulfillment) – and our analysis shows that
this model may also be the most profitable grocery retail
model in India. A hybrid retail model may also accelerate
the disruption of large consumer brands in India, and
we're already seeing signs of this. Other factors unique to
India will only further aid this disruption, in our view.
What drives this view? Online retail in the electronics and apparel
categories in India may follow the global playbook of growth and
penetration, in our view.
l Electronics growth will be driven by the structured nature of the
category, exclusive online products, and attractive pricing
strategy.
The starting point for a successful online grocery model will be one
that offers solutions as close as possible to current grocery shopping
habits and factors in local cultural/social nuances, in our view.
Bringing this closer to home in India, we note that consumers are
used to near instant fulfillment of their daily essentials from a wellestablished
and efficient local grocery shopping model (mom and
pop stores that stock ~1,000 SKUs of daily essentials).
In addition, labor costs in India are amongst the lowest for any large
market globally, urban density is high, shopping baskets are relatively
small and industry gross margins in grocery are >10 percentage
points lower vs. developed markets.
These are factors that likely favor a decentralized eCommerce model
(store-based fulfillment) allowing express delivery of daily essentials.
Our analysis shows that this model may also be the most profitable
grocery retail model in India – even though the economics of fulfillment
may not be the primary concern of players currently.
A hybrid retail model may also accelerate the disruption of large
consumer brands in India: Traditional grocery models will evolve to
protect the business and margins. While the business ranks high on
convenience, it is low on price competitiveness. To address this, traditional
retailers may ask brands for higher trade margins, which can
then be passed on to consumer, and also stock niche brands that
appeal to evolving consumer preferences.
In addition, the hybrid retail model, armed with greater knowledge of
shoppers based on their ordering patterns, also have the ability to
recommend brands for substitution in the shopper basket. Said differently,
the balance of power may shift away from brands and in
favor of the retail channel, altering the evolution trajectory for the
large CPG companies in India.
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