WWRR Vol.2.015

M
FOUNDATION
...which increases the risk of margin compression from store cannibalization:
Morgan Stanley's U.S. Hardline/Broadlines analyst
Simeon Gutman, in his latest report, has observed 50bps of EBIT
margin compression for his coverage for every 1 percentage point
increase in online penetration. Simeon notes that often, online sales
merely come at the expense of in-store sales, and are therefore not
additive to overall growth.
This dynamic causes in-store store expense deleverage because
retailers must maintain store-level investments in wages, rent, utilities,
etc. At the same time, because retailers generally lack scale in
their eCommerce businesses, deleverage in the eCommerce channel
can also occur.
Net, the team estimates that gross margins on delivery are ~1,000
bps below in-store margins.
Based on our calculations, for India, grocery operating margins for
players offering online fulfillment will be materially lower
(3.6%-4.3%) vs. the physical retail model (~5%). The margin hit will
be contingent on the extent of cannibalization of in-store sales as
well as the extent of fulfillment cost borne by the consumer. In our
calculations, we assume in-store gross margins of ~16% (based on
our discussion with the industry) and use a standardized shopping
basket of Rs1,000 along with relatively conservative assessment of
pick, pack, and delivery costs.
Exhibit 9:
Scenario analysis: In-store vs. omni-channel offering delivery
Scenario 1 (S1) - only in-store sales Scenario 2 (S2) - free delivery Scenario 3 (S3) - charged Rs35/order
In-store Instore Delivery Total Instore Delivery Total
Revenues (Rs) 1,500,000 1,200,000 150,000 1,350,000 1,200,000 300,000 1,500,000
Orders per day 1,500 1,200 300 1,500 1,200 300 1,500
x A.O.V (Rs) 1,000 1,000 500 1,000 1,000
Gross profit (@ 16%) 240,000 192,000 24,000 216,000 192,000 48,000 240,000
Total overheads 165,000 165,000 20,983 185,983 165,000 10,483 175,483
as % of sales 11% 14% 14% 14%
- Pick and pack 4,945 4,945
- Fulfillment costs 16,038 5,538
- Others 165,000 165,000 165,000
EBITDA 75,000 27,000 3,017 30,017 27,000 37,517 64,517
EBITDA margins 5.0% 2.3% 2.0% 2.2% 2.3% 12.5% 4.3%
In-store sales
cannibalized by
delivery orders
Assumed basket size of
Rs1,000
Customer bears a partial
cost of fulfillment in S3 vs
free delivery in S2
Store Cannibalization
drives an EBIDTA margin
compression in S2 & S3
Assumptions
Pick and pack
Monthly wages (Rs) 15,000
Orders per day 30-35
Employees required 9
Per delivery cost (Rs) 16
Employee (Fulfillment)
Monthly wages (Rs) 18,000
Employees required 20
Per delivery cost (Rs) 46
Trucking and fuel (Fulfillment)
Vehicle cost per day (Rs) 1,370 Assume 10 vehicles delivering 30 orders a day
Fuel cost per day (Rs)
822 Assume 40km travel per day
Per delivery cost (Rs) 7
Total cost (per order)
Rs70
Source: Morgan Stanley Research Note: A.O.V - Average order value
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