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M<br />
FOUNDATION<br />
Food for Thought<br />
Consumer behavior with free home delivery<br />
Free grocery delivery, while likely positive for sales<br />
growth, could represent a huge margin headwind if it<br />
changes customer purchase frequencies and average<br />
basket sizes. If consumers no longer have to pay a fee for<br />
grocery delivery, they might not feel incentivized to<br />
consolidate their online grocery purchases, and instead<br />
make several orders vs. one consolidated order.<br />
Therefore, we see potential for basket sizes to fall in<br />
response to likely pressure on delivery fees – which could<br />
make delivery even more margin-dilutive than it likely<br />
already is, and potentially economically infeasible. In the<br />
illustration below, in delivery orders which are fulfilled<br />
by a brick and mortar store, if the basket size falls to<br />
Rs500 (vs. Rs1,000), it will erode overall margins by<br />
>100bps (assuming all costs remain constant).<br />
Exhibit 12:<br />
Margin impact from change in basket size of a<br />
delivery order (fulfilled via a brick and mortar<br />
store)<br />
Overall operating margins (%)<br />
3.60%<br />
Delivery order value Rs1,000<br />
Reduction in the delivery order<br />
basket size from Rs1,000 to Rs500<br />
can drive an operating margin<br />
compression of 140bps for the<br />
instore+delivery model<br />
2.20%<br />
Delivery order value Rs500<br />
Source: Morgan Stanley Research estimates<br />
Competition from eCommerce for express delivery<br />
Even as market share gains from traditional retail<br />
represent a clear opportunity for modern format physical<br />
retail, we see rising competition from eCommerce players<br />
on the convenience platform of express delivery for daily<br />
consumption products. There is already evidence of this.<br />
BigBasket (unlisted) offers 90-minute delivery for 1,500+<br />
daily essentials or four regular delivery slots for 20k+<br />
products in select cities. In a "winner take most" market,<br />
it is clear that physical players will need to offer the best<br />
of both price and convenience. Even as we argue that<br />
large players with a pan-India presence will be best<br />
placed to offer on-time express delivery with high fill<br />
rates (>95%), logistical costs may rise further.<br />
Exhibit 13:<br />
BigBasket offers 1,500 SKUs in express delivery<br />
vs. 20,000 overall<br />
BigBasket SKU's<br />
20,000<br />
Total SKU's<br />
Express delivery for BigBasket<br />
which is the 90 min delivery<br />
promise offers 1,500 SKU's of daily<br />
essentials vs the full SKU basket<br />
of 20,000<br />
1,500<br />
Express delivery SKU's<br />
Source: Media reports, Company Data, Morgan<br />
Stanley Research<br />
Traditional mom-and-pop retailers may seek higher<br />
margins from consumer companies<br />
Traditional retail ranks high on convenience (phone<br />
orders, 15- to 30-day credit,