WWRR Vol.2.015

M
FOUNDATION
Grocery models will evolve to protect the
business and margins
The future of retail is moving from mere transactions to
one that is more relational – retailers will use offline
space to create more opportunities for consumers to
connect with the brands.
Larger players are uniquely positioned in five ways
Based on our industry outlook, it is likely that larger players will be
better positioned to navigate the grocery retailing business over the
next five years. They will be uniquely positioned in five ways:
1. Use their scale for efficient procurement;
2. Invest in data and technology in an omni-channel grocery
world;
3. Invest in price to drive market share gains;
4. Invest in store expansion/refurbishment; and
5. Spend more on advertisement to ensure that customers
choose particular brands.
In addition, we also expect grocery players to focus
on three other key areas
Increasing private label brand penetration in the shopper
basket: Based on our calculation, gross margins on private label
brands or even niche/emerging consumer brands can be 5-10 percentage
points higher than those of large established brands. Even if
stores are able to generate 20% of their sales from such brands, it
implies 100-200bps higher gross margins.
We note comments from company
management on their private label
penetration strategy
Hari Menon, CEO – BigBasket: "BigBasket is aiming to
generate 45% of overall sales from its private label
business in the next 2-3 years. Private labels currently
contribute roughly 34% to BigBasket’s revenues. On an
average, private label margins vary from 25-45%, which
makes them an important factor for profitability,”
(Source: Economic Times, July 13, 2018)
Albinder Dhindsa, CEO – Grofers:- "As Grofers becomes
more of a savings platform, we have increased our focus
on private labels in the last seven months to provide
better prices to customers, We currently have 780 private
label items and are adding 30-40 items every month.”
(Source: Economic Times, July 13, 2018)
Doug McMillon, president and CEO of Walmart: "Having
a private brand from a margin mix point of view has
always been important but it's even more important now
and the sourcing capability is even more important now.
Then layer on that loyalty. You can get Tide anywhere,
but you can't get Sam's Club Members Mark or Equate or
Great Value anywhere, and we have engineered the specs
such that you just really love our granola, then there's a
loyalty there, that passes not just through the store, but
through the end of the eCommerce business as well. So
product-driven loyalty becomes even more important
going forward than it was in the past." (Source:
Supermarketnews.com, March 14, 2017)
Cross-selling higher-margin categories like fashion apparel:
Even as we see the multi-pronged battle playing out in grocery, other
higher-margin categories like fashion, accessories, and home
improvement products may help expand profit pools for retailers.
Apparel gross margins are 2-3x those of grocery. It is indeed interesting
to note that F18 gross margin for Avenue Supermarts retail
was 16% vs. 26% for Future Retail, driven primarily by >30% of revenue
contribution in-store from private label apparel brands.
MORGAN STANLEY RESEARCH 15