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M Retail Model #2: Pure Play eCommerce FOUNDATION Grocery retail is a large category and key to success in sustaining eCommerce growth momentum. Online grocery penetration is set to accelerate in India, but the path to profitability is hazy, so is centralized fulfillment a viable option in India? The evolution of eCommerce in India may take a different path vs. that in developed countries for five reasons: delivery performance, labor costs, urban density, industry gross margins and basket size, and assortment availability. In non-grocery eCommerce, online is making quick inroads in electronics, followed by fashion/apparel. Exhibit 14: Pure play e-Commerce retail at a glance Grocery eCommerce Grocery retail is a large category... Source: Morgan Stanley Research Grocery is the largest category within the overall retail market in India, with a 62% share, followed by apparel & footwear at 11% share. Based on our calculations, grocery has the lowest online contribution at ~0.3%, which compares to ~8% for retail sales ex grocery. Exhibit 15: Grocery retail market size; largest category within retail Source: Euromonitor, Morgan Stanley Research 18
M FOUNDATION ..and key to success in sustaining eCommerce growth momentum Being the biggest piece of the pie, grocery will become a meaningful driver of future growth (after electronics and apparel) for eCommerce in India. But it's a tough business, likely "winner take most" – which implies marked improvement in shipping/fulfillment offerings and continuing high marketing expenditures. Exhibit 16: eCommerce sales in India to cross US$200bn by 2026; will constitute ~12% of total retail sales in India We estimate that e- Commerce will contribute 12% to overall retail sales in F2027 eCommerce sales $200bn $18bn As discussed in our report The Next India: India's Digital Leap - The Multi-Trillion Dollar Opportunity, we expect a 30% CAGR in eCommerce sales (including online food ordering) through F2027 (C2026), reaching ~US$200bn of GMV (vs. ~US$18bn in F2018). That translates into 12% online penetration within overall retail sales. With grocery constituting 62% of the retail revenue pool currently, it will become a meaningful driver of future growth (after electronics and apparel) for eCommerce in India. However, grocery retail is a tough business and likely a "winner take most business": Unlike other consumer categories where growth can be catalyzed by price alone, grocery will need to offer superior value (more SKUs, niche product offerings, low shipping charges, price benefits, etc.). Online grocery penetration is set to accelerate in India... We believe it is only a matter of time before online grocery penetration meaningfully accelerates in India. The jury is out on the extent and rate of adoption – but lessons from abroad suggest that urbanization and digitization of consumers is a tide that lifts all boats. Exhibit 17: Online penetration of grocery is low in India 8.4% F2018 Source: Euromonitor, Morgan Stanley Research Estimates F2027 2017 Grocery retail online penetration (%) This implies marked improvement in shipping and fulfillment offerings – retailers are likely to try to match the convenience (express delivery) offered by traditional retail stores in India and offer, say, three-hour home delivery for consumers. However, we expect continuing high marketing expenditures in the business. With increased competition (both Amazon and Walmart/Flipkart) in online grocery retailing in India, we expect spending on marketing to remain at 3-5% of GMV vs. 1% for Ocado (F18). South Korea 5.9% China 4.7% UK 3.6% 3.3% 2.5% Japan France Australia 1.9% USA Singapore 1.3% 1.1% Switzerland Brazil Germany 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% Russia Canada Malaysia Thailand South Africa India* Mexico Indonesia Philippines Source: Euromonitor, Morgan Stanley Research Note: * We use Mse for India MORGAN STANLEY RESEARCH 19
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