WWRR Vol.2.015

M
FOUNDATION
...so is centralized fulfillment a viable option in India?
The key debate in the world of online grocery retail is
whether a centralized fulfillment and delivery model is
essential to ensuring high service quality and profitability.
Our view is that the model for online grocery in each
country will be different and will depend on service
expectations, shopping habits and socioeconomic factors.
Below we explore the five key reasons why the evolution
of eCommerce (especially grocery) in India may take a
different path vs. that in developed countries.
1) Delivery performance: Indian consumers are used to 'instant gratification'
with the traditional retail model in India. The concept of 12-
to 24-hour fulfillment, even if delivered free at home, may not drive
a material shift in their channel preference. For online grocery retail
penetration to accelerate, customers will need express delivery (say,
within three hours). This can only be achieved via a decentralized
model (store pickup, dark stores, hub & spoke warehouse model,
etc).
Moreover, delivery from a central location (which may be outside the
metropolitan limits) will entail a need for three distinct trucking/
delivery models:
l Ambient – grocery and FMCG goods
l Chilled – ice cream, frozen peas, etc.
l Cool – dairy products
That will push costs of delivery higher.
2) Labor costs: Labor costs in India are amongst the lowest for any
large market globally. This makes a decentralized delivery model a
viable option to ensure express delivery.
Exhibit 19:
Modern retail penetration ( top urban centres) will rise to 24% by 2019
% Penetration of Modern Retail 2019e
Top urban centres
Pune
Hyderabad
Chennai
Bengaluru
NCR
MMR
12%
10%
19%
19%
16%
17%
14%
21%
24%
26%
25%
26%
31%
33%
0% 10% 20% 30% 40%
Source: Knight Frank estimates, Morgan Stanley Research Note: MMR: Mumbai Metropolitan Region;
NCR: National Capital Region
2016
3) Urban density: India is a vast country geographically. Brick &
mortar retailing currently contributes less than 10% of overall retail
spending on a pan-India level.
However, with high-density metropolitan areas, modern format
retail contributes ~19% of spending in the top six retail markets.
According to Knight Frank (2016), the penetration of modern format
retail will rise to 24% by 2019. High consumer density amidst relatively
low labor costs, consumer penchant for fresh food and relatively
low basket size, makes a decentralized fulfillment model
economically viable for grocery retailing, in our view.
4) Industry gross margins and basket size: Grocery retail gross
margins in India are ~15% vs. global peers that operate at >25%. Even
the basket size in India is US$100 globally. Now against
this low basket size and industry gross margins, it is clear that for
online fulfillment to be viable, the combined delivery, trucking and
fulfillment costs must be ~10% of sales. Based on current costs, this
may be viable only in a model where a large part of the order fulfillment
(consisting of standard products) is done from a decentralized
centre.
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