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M<br />
Exhibit 20:<br />
Gross margin for grocery retailing in India is the lowest vs. the UK, US,<br />
and South Korea….<br />
35%<br />
Grocery gross margins (%)<br />
30%<br />
29%<br />
25%<br />
25%<br />
23%<br />
20%<br />
15%<br />
15%<br />
10%<br />
5%<br />
0%<br />
UK (Ocado) US (Walmart) S.Korea (E-Mart) India<br />
FOUNDATION<br />
Exhibit 21:<br />
...as is the order size ($) of a single delivery.<br />
160<br />
140<br />
Grocery order size ($)<br />
140<br />
120<br />
110<br />
100<br />
80<br />
70<br />
60<br />
40<br />
20<br />
15<br />
0<br />
UK (Ocado) US (Walmart) S.Korea (E-Mart) India<br />
Source: Company Data, Morgan Stanley Research estimates<br />
Source: Company Data, Morgan Stanley Research estimates<br />
5) Assortment availability: One argument in favor of a centralized<br />
fulfillment model is the availability of a wider assortment from which<br />
customers can choose. However, logistical complexity and costs<br />
increase exponentially with assortment depth, and customers are<br />
unlikely to pay a premium for the entire basket. A decentralized<br />
delivery model may be efficient for regular products, while for niche<br />
items ordered, delivery can be the normal cycle (say, 48 hours).<br />
grocery. Providing these retailers with an established online platform<br />
could be a win-win.<br />
This strategy is currently being pursued by Amazon, which (along<br />
with private equity firm Samara) has acquired the More retail chain.<br />
Flipkart, on the other hand, has not shown interest in acquiring or<br />
partnering with a brick & mortar retailer yet.<br />
Online grocery in India is currently provided by a few large vertical<br />
players such as BigBasket and Grofers – and increasingly we hear<br />
about the intentions of Amazon India and Flipkart to get serious on<br />
grocery, both to attack a large addressable opportunity with good<br />
gross margins and to improve customer engagement. Per media<br />
reports (e.g., Economic Times, August 8, 2018), Flipkart launched grocery<br />
services in Bengaluru, India in July 2018 and is looking to extend<br />
these services to 5-6 major cities by the end of 2018. Of interest,<br />
according to Flipkart, grocery has the highest potential to generate<br />
repeat business and ensure customer retention. A comparison of<br />
BigBasket grocery business with Amazon's is in Exhibit 22 below.<br />
Unlike in the US, where large chains hold a significant amount of<br />
share, the Indian retail market remains highly fragmented and big box<br />
chains are underdeveloped. As we have seen in the US and other<br />
countries, it is difficult and costly for a retailer to go from a brick &<br />
mortar only model to a next level omni-channel model with online<br />
capabilities. Because big box retail is underdeveloped and eCommerce<br />
is moving at a rapid pace, there may be an opportunity to skip<br />
the traditional omni-channel model and leapfrog to a hybrid model<br />
in India.<br />
Large eCommerce (Flipkart, Amazon, BigBasket) and brick & mortar<br />
(Reliance, Future, D-Mart) players already exist and can work<br />
together. These retailers are attractive because they are among the<br />
biggest in India and are currently using their own websites for online<br />
One possible reason is that it now has access to Walmart’s ~20<br />
wholesale cash & carry locations in India, which mitigates the need<br />
for a larger physical presence.<br />
The other and more plausible reason from our Walmart analyst<br />
(Simeon Gutman) is that Walmart is unlikely to pursue a major acquisition<br />
in the foreseeable future in that it is just beginning to digest the<br />
Flipkart acquisition. During the Walmart Investor Day on October 16,<br />
2018, Walmart's management stated that it would be supportive of<br />
a Flipkart IPO sometime in the future. While it did not disclose any<br />
specific details around the possible timelines of the IPO, we believe<br />
any large acquisition in the interim could complicate this path.<br />
Walmart is instead focused on execution – it has recently installed<br />
executives to bolster Flipkart’s eCommerce fundamentals,<br />
accounting, and control functions – and believes there is enough<br />
growth opportunity in segments outside of grocery in the near term.<br />
Once the deal is past the integration phase, Flipkart could also start<br />
looking for omni-channel opportunities.<br />
If Indian retailers are valued at 1.0x EV/sales, the same multiple as the<br />
More transaction, it would imply an outlay of ~$250mn-$2bn. The<br />
upper end of this band would be a meaningful portion of any major<br />
retailers’ FCF, and hence further market consolidation may focus<br />
either on smaller/less expensive players or a stake purchase in an offline<br />
retailer.<br />
MORGAN STANLEY RESEARCH 23
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