WWRR Vol.2.015

M
FOUNDATION
Orders generated on the eCommerce platform and fulfilled from a
nearby store via the pick and pack model form a win-win arrangement
– "advantage, brick and mortar" with higher sales throughput and
arguably lower cannibalization of sales from existing in-store customers.
The impact on in-store profitability could be even higher
given the high fixed cost nature of the business. Our calculations suggest
that a 15% increase in store throughput with, say, 8% of revenues
(as commissions) shared with the eCommerce partner can drive a
24% increase in profitability for the physical retailer.
In the event that the model is able to generate 30% higher orders, the
overall profitability could increase >40%.
In addition, it is also "advantage, eCommerce companies" that can
offer express delivery for a wider assortment with markedly lower
price than the neighborhood store – a sustainable competitive
advantage, in our view.
another argument in favor of the potential for rapid disruption in consumer
staples in India.
The importance of data analysis in retail is rising: Big data is a
game-changer and retailers are beginning to accept this.
Data were always available for modern format retailers in the form
of analysis of consumer trends based on loyalty cards. Yet the
inherent shortcoming was that customers did not always carry them,
and even if they did, it was difficult to have the right conversations
with customers at the right time.
Shopping apps with an integrated mobile wallet on a customer's
mobile phone allow retailers to gather information which hitherto
was not possible, including location, proximity to a store, browsing
history, and real-time feedback on consumer offers. Such apps also
enable improved inventory management and forecasting.
….with greater focus on convenience vs. price: The hybrid retail
model will move the battle away from “price” to “service.” The power
of being able to influence brand purchases will be a tectonic shift as
the balance of power goes from brand owners to channel owners –
We present here an example to show the power of information for
modern format retailing and how can that be best harnessed with an
omni- channel retail strategy.
Exhibit 32:
Hybrid model offers potential for 20-40% increase in EBITDA for physical retailers
Hybrid model Physical Retail + e-Commerce)
Instore Delivery Delivery
15% higher orders Total 30% higher orders Total
Revenues (Rs) 1,500,000 225,000 1,725,000 450,000 1,950,000
Orders per day 1,500 225 1,725 450 1,950
x A.O.V (Rs) 1,000 1,000 1,000 1,000 1,000
Gross profit (@ 16%) 240,000 36,000 276,000 72,000 312,000
Total overheads 165,000 18,000 183,000 39,709 204,709
as % of sales 11% 8% 9%
- e-Commerce commisions (@8%) - 18,000 36,000
- Others 165,000 - 3,709
EBITDA 75,000 18,000 93,000 32,291 107,290
Increase in EBITDA 24% 43%
Potential for
20-40%
increase in
profitability
Commission paid to e-
commerce partner for
new order generation
A store can fulfill 15% higher
orders without incurring
additional costs of Rs16 per
order
Source: Morgan Stanley Research Note: A.O.V - Average order value
MORGAN STANLEY RESEARCH 29