Sector Thematic Retail - Whose flywheel...Big Bazaar 40-45 Spencer's Retail 50 Star Bazaar/Market 20 Spar 60-70 Reliance Smart

Sector Thematic

Retail

Whose flywheel is broken?

The COVID-19 pandemic playing havoc in the high fixed cost Food & Grocery

space is a foregone conclusion. More important is to assess which business model

survives an extended version of the pandemic. This led us to assess multiple

COGS of the proverbial retail flywheel: (1) Location: Store exposure to most

impacted districts (~600 districts analyzed on COVID19 severity, population

density and per capita income) (2) impact on GMs, cost of retailing and fixed cost

cover, (3) fear-inflicted shifts in consumer behaviour and consequent habit

formation and (4) selection and discounting trends.

Bottom-line: The pandemic is likely to push the already stressed org. top-up

formats/indiciplined operators closer to their ‘To be, or not to be’ moment. E-

grocers are scaling up well (Higher AoVs have significantly improved their unit

economics) and are likely to win share from the top-up format in their respective

catchments. Industry bellwether D-MART’s footfall pain is likely to spill-over in

2Q. However, it remains well-capitalized to take the impact on its chin.

Jay Gandhi Retail

[email protected]

+91-22-6171-7320

14 July 2020 Sector Thematic

Retail

HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters

Whose flywheel is broken? The COVID-19 pandemic playing havoc in the high fixed cost retail sector is a

foregone conclusion. More important is to assess which business model

survives an extended version of the pandemic. This led us to assess multiple

COGS of the proverbial retail flywheel: (1) store exposure to most impacted

districts, (2) impact on GMs, cost of retailing and fixed cost cover, (3) fear-

inflicted shifts in consumer behaviour and consequent habit formation and (4)

selection and discounting trends. Note: We restrict our scope to the Food &

Grocery (F&G) space in this report. DMART's (RECO: SELL) footfall pain is

likely to spill over in 2Q as well, as (1) its store exposure to most affected

districts remains high (67% of stores). Hence, footfall cuts are likely to remain

steep, and higher AoVs will not be enough to make up for the footfall cuts. (2)

Org. top-up formats have were already struggling even pre-COVID; the

pandemic is likely to cause further stress on their cost of retailing and

respective cash cover for fixed cost absorption. Meanwhile, e-grocers have

been scaling up nicely in some of these catchments.

Soldier down – DMART most exposed, but well-covered: While most

grocers are likely to see severe footfall cuts, our district-wise store map (~600

districts) on COVID-19 severity, population density and per capita income

suggests that ~45% of D-MART's stores are located in seven of the most

populated/impacted districts (Mumbai, Pune, Thane, Kalyan, Ahmedabad,

Bangalore and Hyderabad). Also, D-MART's significantly higher footfall

density per store (base) vs peers (2,824 bill cuts per store/day) likely means

that the delta loss in footfalls, at least momentarily (1HFY21), will remain

the highest among peers (note: D-MART's revenue declined 34% YoY in

1QFY21). That said, its recent fund raise makes it among the most well-

capitalised grocers from a fixed-cost cover point of view, while peers remain

precariously placed on this front.

…Managing discounts well to restrict the bottom-line pain: D-MART has

smartly reduced its discounts across its product portfolio to reduce the

impact on profitability as, during the pandemic, assortment availability is

likely to take precedence over value/discounts for a consumer.

Is COVID-19 e-grocers' 'demonetisation moment'? Probably Yes! (1)

Consumers' obvious predisposition for safety during the pandemic, (2)

income uncertainty, (3) shift from unpackaged to packaged food and

sporadic availability of national brands have fed into the surge in private

label consumption across categories, (ergo, AoVs for e-grocers have spiked).

Also, first-time users sampling e-grocer services have significantly jumped.

We suspect the stickiness to the platforms once sampled is likely to be

high. Note: AOVs for top e-grocers is up 40-50% in 1Q, giving a

significant fillip to their unit economics (refer: a case study on Grofers).

Pandemic to make organised F&G even more top-heavy: Online grocery

purchases are likely to increase during the pandemic as consumers seek

safety. This, in turn, is likely to put pressure on the cost of retailing for the

industry as investments in online fulfilment capabilities increasingly

becomes imperative. Most retailers today have bare-bone investments in the

same, given (1) weak cash position, and (2) risk of bleeding further. Note:

Most grocers don't make a profit spread in India. Hence, we expect the

pandemic to expedite the process of consolidation in F&G.

Company Reco

Avemue Supermarts SELL

Jay Gandhi

[email protected]

+91-22-6171-7320

67 55

44

100

59 72

22

D M

art

Big

Ba

za

ar

Rel

ian

ce S

ma

rt

Sta

r B

az

aa

r

Sp

ence

rs

Sp

ar

Vis

ha

l

Store Exposure to high impact

zones

-89

-19

5 7

20

39

FY

16 E

BIT

DA

mar

gin

GP

M i

ncr

ease

FF

C/O

ther

s (A

s %

of

rev

)

S&

M (

As

% o

f re

v)

Oth

ers

(As

% o

f re

v)

FY

20E

EB

ITD

A m

arg

in

Online grocers profitability

Page | 2

Retail : Sector Thematic

Contents

Soldier Down (D-MART), smartly managing discounts to restrict bottom-line pain . 3

Is COVID19, E-grocers’ de-monet moment? ..................................................................... 9

Case Study: Grofers ............................................................................................................ 10

High cost of retailing + Online heat + Weak cash position warrants partnerships .... 13

Page | 3


Soldier down, (not out)!

Even the best not spared: Our district-wise store mapping (on per capita income-

population and COVID density) suggests that most offline organised grocers are

likely to be impacted as higher bill sizes are not expected to make up for the loss in

footfalls. The situation is likely to be even grimmer for (1) retailers with a higher

presence in top cities, (2) higher mall-based presence.

A point to note, ~45% of D-MART's stores are in seven of the most populated

and, hence, severely COVID-stricken districts (Mumbai, Pune, Thane, Kalyan,

Ahmedabad, Bangalore, and Hyderabad). In each of these districts, the confirmed

COVID cases are >10,000, Caseload (active/confirmed cases) is >25% and the

confirmed/tested ratio is 15-35%, i.e., the possibility of a second wave cannot be

ruled out. We suspect the contribution of these districts to revenue is likely to be

over 65-70% (HSIE).

The above, coupled with D-MART's significantly higher footfall density per store

(base) vs peers (2,824 bill cuts per store per day in FY20), suggests that the delta

loss in footfalls for D-MART, at least momentarily (1HFY21), is expected to be the

highest among peers (note: D-MART's revenue declined 34% YoY in 1QFY21).

Kirana network and online grocers' presence in these districts is also extremely

dense. Ergo, alternatives to avail and avoid a trip to an organised grocer are more

in these geographies.

The ability to maneuver product mix to cushion profitability remains stifled

(improving though) as most consumers in these geographies prefer or are

restricted by law to purchasing essentials only (note: D-MART's gross margin

contracted 245bp YoY to 13.7% in 1QFY21). That said, D-MART has been smartly

reining in discounts across categories to restrict the impact of revenue decline on

profitability.

Big Bazaar and Spencer's have a significant mall-based presence (40-50% of

stores) wherein footfalls are likely to be impacted the most.

Reliance Smart is likely to be the least impacted, given its predominant Tier 2/3

presence wherein the outbreak of the virus is limited. Also, local Fresh Markets in

some of Reliance Smart's districts are weak and, hence, alternatives to shop for

fruits and vegetables are less.

Estimated Mall-based presence across key grocers

D-MART 0

Big Bazaar 40-45

Spencer's Retail 50

Star Bazaar/Market 20

Spar 60-70

Reliance Smart <10

Page | 4


Store exposure to high impact districts. D-MART and Star remain most exposed

District (#) Population (mn) COVID Cases D Mart Big Bazaar Reliance

Smart Star Bazaar Spencers Spar

Vishal

Megamart

<Rs. 100K 14 50 25,640 0.5 8.0 2.1 - 13.0 4.0 8.2

<300 Km² 2 5 5,374 - 0.4 0.4 - - - 0.6

300-500 3 8 6,407 - 0.4 - - - - -

500-1000 2 9 2,323 - - - - - - -

1000-3000 6 23 8,260 - 5.1 - - 11.4 - 3.8

3000-5000 1 5 3,276 0.5 2.2 1.7 - 1.6 4.0 3.8

100-150K 15 52 36,283 2.0 4.7 5.0 - 3.3 - 3.1

<300 1 2 1,517 - - - - - - -

300-500 9 25 20,709 2.0 2.5 3.3 - 2.4 - 0.6

500-1000 1 2 1,336 - 0.7 1.2 - - - 1.3

1000-3000 3 18 8,601 - 0.7 0.4 - - - 1.3

3000-5000 1 5 4,120 - 0.7 - - 0.8 - -

150-200K 23 84 70,327 13.4 11.6 9.5 2.6 23.6 - 4.4

<300 9 31 21,761 5.5 0.7 2.5 - 1.6 - 0.6

300-500 4 18 13,626 2.5 2.2 2.5 - 7.3 - -

500-1000 8 24 16,799 2.5 1.8 3.3 2.6 - - 2.5

1000-3000 1 6 8,115 3.0 0.4 0.8 - - - -

5000+ 1 4 10,026 - 6.5 0.4 - 14.6 - 1.3

200-250K 12 41 30,425 3.5 4.0 5.4 - 1.6 8.0 2.5

300-500 3 8 6,506 0.5 1.1 0.8 - - - 0.6

500-1000 6 20 13,359 3.0 1.5 4.1 - 1.6 8.0 0.6

1000-3000 3 12 10,560 - 1.5 0.4 - - - 1.3

250-300K 3 22 112,229 10.9 6.9 5.4 20.5 - - 0.6

500-1000 1 9 39,125 7.5 3.3 4.6 20.5 - - 0.6

1000-3000 2 13 73,104 3.5 3.6 0.8 - - - -

300-500K 6 35 156,143 32.8 19.3 14.5 76.9 17.1 60.0 3.1

300-500 1 2 2,353 - 1.1 0.8 - - 8.0 -

500-1000 1 5 2,600 - - 0.8 - - - -

3000-5000 1 10 19,702 9.0 6.9 3.7 46.2 1.6 32.0 2.5

5000+ 3 18 131,488 23.9 11.3 9.1 30.8 15.4 20.0 0.6

Gujarat 2 4 3,126 3.5 0.7 1.7 - 0.8 - -

500-1000 1 4 3,126 3.0 0.7 1.7 - 0.8 - -

1000-3000 1 0 0.5 - - - - - -

Grand Total 75 289 434,173 66.7 55.3 43.6 100.0 59.3 72.0 22.0

Source: Company, HSIE Research

Note: Covid cases are as on 13th July 2020, Districts culled out – COVID cases > 10000, Active/Confirmed Cases > 25%

Top 22 cities account for ~30% of consumption

Source: Technopak

5.8 5.8

12.0

2.5 2.0 2.0 1.7 1.7 1.4

11.0

0.9 0.8 0.7 0.5 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.2 0.2 0.2

7.0

- 2.0 4.0 6.0 8.0 10.0 12.0 14.0

-

50

100

150

200

250

Mu

mb

ai

Del

hi-

NC

R

TO

P 2

CIT

IES

Ban

gal

ore

Ah

med

abad

Ko

lkat

a

Ch

enn

ai

Hy

der

abad

Pu

ne

NE

XT

6 C

ITIE

S

Ko

chi

Su

rat

Co

imb

ato

re

Vad

od

ara

Vis

hak

hap

atn

…

Pat

na

Tri

van

dru

m

Ch

and

igar

h

Jaip

ur

Ind

ore

Lu

dh

ian

a

Lu

ckn

ow

Bh

op

al

Rai

pu

r

Bh

ub

anes

hw

ar

Ran

chi

NE

XT

16

CIT

IES

Consumption (US Bn) Consumption share (%)

Page | 5


D-MART is managing discounts well to restrict the bottom-line pain: D-MART

has smartly reduced its discounts across its product portfolio to reduce the

impact on profitability as, during the pandemic, assortment availability is likely

to take precedence over value/discounts for a consumer.

DMART’s weekly discount trends in Grocery DMART’s weekly discount trends in Packaged food

Source: Company, HSIE Research Source: Company, HSIE Research

DMART’s weekly discount trends in Dairy &

beverages

DMART’s weekly discount trends in Home Care

Source: Company, HSIE Research Source: Company, HSIE Research

(24.0)

(21.0)

(18.0)

(15.0)

(12.0)

(9.0)

(6.0)

(3.0)

-

14

-Ma

r

22

-Ma

r

28

-Ma

r

7-A

pr

15

-Ap

r

25

-Ap

r

1-M

ay

8-M

ay

15

-Ma

y

23

-Ma

y

29

-Ma

y

4-J

un

12

-Ju

n

19

-Ju

n

27

-Ju

n

4-J

ul

11

-Ju

l

Grocery

(18.0)

(15.0)

(12.0)

(9.0)

(6.0)

(3.0)

-

14

-Ma

r

22

-Ma

r

28

-Ma

r

7-A

pr

15

-Ap

r

25

-Ap

r

1-M

ay

8-M

ay

15

-Ma

y

23

-Ma

y

29

-Ma

y

4-J

un

12

-Ju

n

19

-Ju

n

27

-Ju

n

4-J

ul

11

-Ju

l

Packaged Food

(12.0)

(9.0)

(6.0)

(3.0)

-

14

-Ma

r

22

-Ma

r

28

-Ma

r

7-A

pr

15

-Ap

r

25

-Ap

r

1-M

ay

8-M

ay

15

-Ma

y

23

-Ma

y

29

-Ma

y

4-J

un

12

-Ju

n

19

-Ju

n

27

-Ju

n

4-J

ul

11

-Ju

l

Dairy & Bevarages

(18.0)

(15.0)

(12.0)

(9.0)

(6.0)

(3.0)

-

14

-Ma

r

22

-Ma

r

28

-Ma

r

7-A

pr

15

-Ap

r

25

-Ap

r

1-M

ay

8-M

ay

15

-Ma

y

23

-Ma

y

29

-Ma

y

4-J

un

12

-Ju

n

19

-Ju

n

27

-Ju

n

4-J

ul

11

-Ju

l

Home Care

Page | 6


DMART’s weekly discount trends in Personal Needs WC 14-Mar: DMART’s discount edge over Peers



WC 22-Mar: DMART’s discount edge over Peers WC 28-Mar: DMART’s discount edge over Peers



WC 07-Apr: DMART’s discount edge over Peers WC 15-Apr: DMART’s discount edge over Peers



(24.0)

(21.0)

(18.0)

(15.0)

(12.0)

(9.0)

(6.0)

(3.0)

-

14

-Ma

r

22

-Ma

r

28

-Ma

r

7-A

pr

15

-Ap

r

25

-Ap

r

1-M

ay

8-M

ay

15

-Ma

y

23

-Ma

y

29

-Ma

y

4-J

un

12

-Ju

n

19

-Ju

n

27

-Ju

n

4-J

ul

11

-Ju

l

Personal Needs

(7)

(3)

2

(9)

(3)

(4)

(14

)

(7)(3

)

(10

)

(11

)

(10

) (8)

(11

)

(13

)

(13

)

2

(11

) (6) (3

)

(6)

(7)

(6)

(9)

(7)

(9)

(3)

(12

) (9)

(11

)

(4)

(8)

8

(0)

11

2

(5)

(7)

(7)

(12

)

(20)

(15)

(10)

(5)

-

5

10

15

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt

Grocery Packaged Food Dairy & Bevarages

Home Care Personal Needs

1

(9)

(4)

(9)

-

(10

)

(17

)

(2)

(6)

(10

)

(3)

(5)

-

(11

)

(11

)

(11

)

(6)

(7)

8

(6)

-

(8) (6

)

(10

)

(16

)

(9)

3

(8)

-

(10

)

(2)

(12

)

4

(15

)

9

4

-

(13

)

(6)

(7)

(20)

(15)

(10)

(5)

-

5

10

15

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(8)

(10

)

- -

(17

)

-

(17

)

(2)

(8)

(11

)

- -

(9)

-

(11

)

(11

)(9) (8

)

- -

(7)

-

(6)

(10

)

(17

)

(8)

- - - -

(6)

(12

)

(7)

9

- -

(7)

-

(7)

-

(20)

(15)

(10)

(5)

-

5

10

15

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(5.6

)

(4.2

)

-

(4.6

)

(22

.6)

(7.0

)

(10

.2)

-

(5.2

)

(6.3

)

- - -

(6.7

)

(6.5

)

(8.7

)

(3.6

)

(7.9

)

-

(0.6

)

- -

(3.7

)

-

(16

.3)

(16

.3)

-

(12

.1)

- -

(4.9

)

-

(15

.1)

7.8

-

(15

.3)

- -

(8.7

)

-

(25.0)

(20.0)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



4

(2)

-

(7)

(12

)

1

(3)

-

(5)

(9)

- 1

(10

) (6)

(6)

(9)(6

)

4

-

(2)

13

(5) (2

)

-

(11

) (9)

-

(6)

1

(12

)

(3)

-

(12

)

(11

)

-

(7)

(21

)

(12

)

(10

)

-

(30)

(20)

(10)

-

10

20

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rtGrocery Packaged Food Dairy & Bevarages


Page | 7


WC 25-Apr: DMART’s discount edge over Peers WC 01-May: DMART’s discount edge over Peers



WC 08-May: DMART’s discount edge over Peers WC 15-May: DMART’s discount edge over Peers



WC 23-May: DMART’s discount edge over Peers WC 29-May: DMART’s discount edge over Peers



(8)

(14

)

(6)

-

(19

)

(11

)

(11

)

-

(3)

(6)

-

(2)

-

(2)

(5)

(7)

14

1

1

3

(5)

1

(1)

-

(4)

(4)

3

(1)

-

5

3

-

(14

)

(11

)

(1)

(11

)

(27

)

(12

) (8)

-

(30)

(20)

(10)

-

10

20

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(8)

(10

)

(2)

4

(17

)

-

(11

)

(13

)

(7)

12

-

(6)

- -

(8)

-

10

0

- 0 1

-

(1)

(3)

-

(9)

(3)

(9)

(15

)

-

(7)

-

(10

)

(12

)

(11

)

(17

)

(8)

-

(10

)

(11

)

(20)

(15)

(10)

(5)

-

5

10

15

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(8)

(12

)

(3)

(2)

(10

)

(20

)

(11

)

(11

)

(10

) (8)

(10

) (8)

(10

)

(8)

(5)

-

(3)

5

(4) (1

)

(7)

2

(5)

(3)

-

(5)

-

13

(1)

-

(3)

-

(13

)

(11

)

(23

)

(10

)

2

(2)

(8)

(11

)

(30)

(20)

(10)

-

10

20

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(6) (5

)

(7)

0

-

(11

) (7)

(8)

(6)

(8)

(6)

(9)

-

(7)

(7)

(12

)

(4)

6

3 6

(6)

0

(2)

(6)

(1)

(3) (1)

(20

)

11

-

(2)

-

(6) (4)

(4)

(5)

5

(10

) (8)

(15

)

(25)(20)(15)(10)

(5)-5

10 15

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(13

)

(14

)

(38

)

(4)

29

(17

)

(13

) (9)

(2)

(7)

(7) (3

)

(11

)

(9)

(7)

1

(3)

2

(3)

0

(5)

0

(2)

2

(2)

(5)

(4)

11

-

(2)

6

(13

) (8)

4

(10

)

(9)

(16

) (9)

(1)

(60)

(40)

(20)

-

20

40

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(11

)

(14

)

(4) (1

)

(14

)

(17

)

(6)

16

(8)

(5) (0)

(4)

(16

)

26

(2) (1

)

(7)

(6)

(2)

(4)

(3)

0

(5)

19

(14

)

(5)

22

(8) (3

)

-

(5)

7

(7) (2

)

(7)

(12

)

(6)

(7)

(9)

11

(20)

(10)

-

10

20

30

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma



Page | 8


WC 04-Jun: DMART’s discount edge over Peers WC 12-Jun: DMART’s discount edge over Peers



WC 19-Jun: DMART’s discount edge over Peers WC 27-Jun: DMART’s discount edge over Peers



WC 02-Jul: DMART’s discount edge over Peers WC 10-Jul: DMART’s discount edge over Peers



(7)

(12

)

(6)

(9) (8

)

(18

)

(8)

0

(7) (7

)

(7)

(1)

(7)

(8)

(7)

10

(6)

(6)

(2)

(5)

(5)

(3)

(5)

2

(14

)

(7) (5

)

(5)

(5)

-

(6) (3

)

1

(4)

1

(7)

(7)

(16

)

(7)

9

(20)

(15)

(10)

(5)

-

5

10

15

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



1

(7) (3

)

(5) (5)

(12

)

(0)

1

(11

) (8)

(7)

(2)

(13

) (7)

(8)

3

(7)

(7)

(4)

(5)

(5)

1

(3)

3

(11

) (7)

19

(5)

(2)

-

(6)

2

(2)

(6) (1)

(7)

(21

) (14

) (8)

14

(30)

(20)

(10)

-

10

20

30

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



(4)

(11

)

4

(8) (3

)

(13

)

(5)

(3)

(11

)

(10

)

(8)

(0)

(10

)

(11

)

(8)

4

(4)

(6) (6

)

(4) (5

) (1)

(2)

4

(2)

(5)

38

(2) (1

)

11

(2)

16

2

(5)

5

(9)

(9)

(14

) (7)

9

(20)

(10)

-

10

20

30

40

50

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



10

(6)

(5)

(1)

(6)

(6)

2

2

(8) (3

)

(8)

1

(9)

(10

)

(7)

3

(4)

(5)

(2)

(5) (4

) (2)

(4)

5

(2)

(2)

38

- -

(2) (2)

16

3

1 5

(4)

(21

)

(8) (5

)

24

(30)

(20)

(10)

-

10

20

30

40

50

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

Rel

ian

ce S

ma

rt



5

(6)

3

(6)

(8)

(5) (1

)

1

(7) (3

)

(4)

1

(9)

(9)

(6)

9

(5)

(4) (4

)

(5) (5

) (3)

(5)

4

(14

)

(11

)

(11

)

(31

)

(3)

(6)

(10

)

(4)

5

2

6

(10

)

(15

)

(1)

(5)

6

(40)

(30)

(20)

(10)

-

10

20

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

JIO

Ma

rt



(2)

(11

)

(3)

(7)

(12

)

(10

) (8)

(2)

(7) (3

)

(5)

5

(8) (5

)

(7)

4

(10

) (8) (5) (6)

(5)

(6)

(8)

2

-

(4)

- - -

11

0

11

7

(10

)

(3)

(5)

(6) (3

) (1)

1

(15)

(10)

(5)

-

5

10

15

Gro

fers

Big

Ba

sket

Am

az

on

Pa

ntr

y

Fli

pk

art

Sp

ence

rs

Sp

ar

Sta

r B

az

aar

JIO

Ma



Page | 9


Is COVID19, E-grocers’ de-monet moment?

E-grocers scaling well, Selection remains a concern though

Even pre-COVID, the major e-grocers had been scaling up nicely. Despite rising

discounts, margin profile – both at the gross and operational level – had been

improving with each passing year for online grocers. This implies that (1) trade

margins are improving as they achieve scale and (2) incremental funding is now

primarily earmarked towards footprint expansion, marketing and strengthening

vendor/private label manufacturer ecosystem.

As consumers grapple with the pandemic, three momentary shifts in consumer

purchasing behaviours have decisively tipped the scales in favour of e-grocers –

just like demonetisation did for digital payment companies.

1. Larger basket sizes are driven by the propensity to move towards a more

stock-up behaviour with customers buying more product categories in one

go (note: AoVs have inched up by 40-50% during 1QFY21 for e-grocers).

2. The salience of discounts and national brands' selection has come off (at least

momentarily), i.e., consumers are less discerning in their purchases today

and more open to sampling private labels; ergo, retail margins have inched

up

3. Consumers' preference for lesser grocery trips to avoid exposure to the virus

(at-least in top cities) has led to more first-time users sampling e-grocer

services. This has also led to a significant reduction in customer acquisition

and marketing costs for e-grocers.

Consequently, the unit economics of e-grocers has significantly improved.

Despite rising discounts, online grocers’ fixed cost absorption has improved, implying that trade margins have

improved



While some of these momentary behavioral shifts may revert to their mean, the

questions to solve for are:

1. How many consumers sampling online grocery for the first time today end

up forming a habit? What does this mean for offline folks?

2. Can e-grocers scale up during the pandemic to a point where they become a

strong distribution platform for national brands? Hence, sourcing margins

improve, ergo economics improve?

3. Do e-grocers have enough dough to see them through this scale up?

We use Grofers as a case study to attempt answering these questions

-89

-19

5 7

20

39

FY

16 E

BIT

DA

mar

gin

GP

M i

ncr

ease

FF

C/O

ther

s (A

s

% o

f re

v)

S&

M (

As

% o

f

rev

)

Oth

ers

(As

% o

f

rev

)

FY

20E

EB

ITD

A

mar

gin

Online grocers profitability

-

5

10

15

20

FY16 FY17 FY18 FY19 FY20E

Online fulfilment costs (As % of rev)

Page | 10


Grofers – Smartly inching towards self-sustenance

Online F&G penetration remains abysmally low at <1%. While there are two

major vertical players catering to the segment ‐ Grofers and Big Basket -

deep‐pocketed horizontal retailers have also been making moves to join the race

and capture their share of the biggest pie in retail. Grofers' strong catchment

remains the Delhi‐NCR region, and its overall presence spans 30 cities.

Since the onset of the nationwide lockdown, Grofers has managed to (1) increase

its AoV by ~40% to Rs. 2,300 and (2) improve upon its GMs (now ~15%) as

consumers prioritised safety over selection choices and were more open to

sample private labels. Private labels mix increased to 35% of sales (earlier 30%).

Hence, rising AOVs and GMs have helped Grofers improve upon its fixed cost

absorption to the point that now the cash burn is restricted to a mere USD1mn

per month, thereby buying them over five years to scale the business even

further.

Shrinking wallets (courtesy job losses/uncertainty) coupled with heightened

safety needs during the pandemic fed into the surge in packaged private label

sales (50-60% of new users were Kirana store shoppers, a lot of whom typically

rely on unpackaged commodities who migrated to packaged food).

Given the share gain is from unpackaged to packaged commodity categories, we

suspect the stickiness to the platform once sampled is likely to be high (once the

consumer is in Grofers-fold, the e-grocer manages to maintain a 70/60% monthly

and annual retention rate). This helps the e-grocer scale faster and more

profitably at that. Scale can then be used to better sourcing margins with national

brands and improve upon selection, which further feeds into better fixed cost

absorption and better traffic quality.

Note: A&P and marketing spends have significantly reduced as the pandemic

has organically sharpened the awareness of e-grocers in the ecosystem. Customer

acquisition costs in April had come down to as low as USD0.05 and even

currently is sub USD1 (vs USD6-7 a couple of years ago).

Grofers intends to hit EBITDA break-even in the next 6-9 months.

While Pre-COVID, profitability was improving, the pandemic has only expedited the rate of improvement for

Grofers


-63

-20

1 5

9

28

FY

18 E

BIT

DA

mar

gin

GP

M i

ncr

ease

FF

C/O

ther

s (A

s %

of

rev

)

S&

M (

As

% o

f re

v)

Oth

ers

(As

% o

f

rev

)

FY

20E

EB

ITD

A

mar

gin

Grofers profitability FY18-20E

-20

-6 5 -1

10

FY

20 E

BIT

DA

M

GP

M i

ncr

ease

FF

C (

As

% o

f re

v)

Oth

ers

(As

% o

f

rev

)

1QF

Y21

E

EB

ITD

AM

Grofers profitability

Page | 11


What does this mean for offline folks? Given the higher presence of Grofers in

Delhi-NCR, Bihar, UP, and Kolkata, inefficient operators such as Big Bazaar and

Vishal Megamart (high presence in Delhi-NCR) are likely to feel the heat, given

their higher GPMs, higher cost of retailing and low cash cover on fixed costs.

Consequently, these operators are likely to cede share to the e-grocer in these

catchments.

Selection remains a concern, though, for most: Across our basket of 50+ fast-

moving CPG items, D-MART selection/availability continues to score the highest

and is well-synced to its respective catchments. However, the same cannot be

said for most in the ecosystem. While such uncertain times may spur private

label consumption, in the long-term, a well-rounded mix of national brands and

private labels is key to attract footfalls/traffic. We believe e-grocers could perhaps

use the scale achieved during the pandemic to fish out better deals with national

brands and improve their selection.

D-MART leads the pack in selection of national brands, selection edge remains significant vs peers

14-Mar 22-Mar 28-Mar 7-Apr 15-Apr 25-Apr 1-May 8-May 15-May 23-May 29-May 4-Jun 12-Jun 19-Jun 27-Jun 2-Jul 10-Jul

DMART 2 11 9 31 15 14 15 16 10 11 8 9 6 7 7 7 9

Grofers 17 27 28 19 26 22 27 33 26 27 28 23 25 22 29 22 25

Big Basket 6 15 17 15 13 16 14 17 13 12 10 4 6 8 13 10 8

Amazon Pantry 19 32 51 51 51 34 35 37 21 25 18 18 17 20 20 21 14

Flipkart 11 21 51 32 26 12 23 14 18 18 20 16 19 21 23 19 33

Spencers 11 51 39 46 34 41 39 37 39 32 34 32 30 29 34 31 32

Spar 5 6 51 45 29 29 51 31 31 32 33 32 24 20 14 15 20

Star 1 4 5 6 7 5 4 5 4 5 5 6 6 5 5 6 5

JIOMART 9 29 31 46 46 46 39 35 21 26 35 39 21 23 22 22 23

Source: Company, HSIE Research, Note: the above table highlights the number of unavailable commodities, ergo lower the number better the selection

Page | 12


Commodities tracked:

Category Brand Quantity

Grocery Saffola Active Oil 1 L

Fortune Sunlite Refined Sunflower Oil 1 L

India Gate Basmati Rice - Feast Rozzana 5 Kg

Tur dal - private label 1 kg

Branded sugar 1 kg

Tomato 1 kg

Onion 1 kg

Potato 1 kg

Urad dal 1 kg

Moog dal (Tata Sampann) 1 kg

Toor dal (Tata Sampann) 1 kg

Chana dal (Tata Sampann) 500 gms

Aashirwad Select Sharbati Atta 5 kg

Tata salt 1 kg

Packaged Food Kellogg's Cornflakes - Original 875 gm

Tropicana Orange Delight Juice 1 L

Parle G Biscuits 800 gm

Hide and Seek Biscuits 350 gm

Britannia Bourbon 150 gm

Britannia Treat Jim Jam Cream Biscuits 150 gm

Maggi 560 gm

Bournvita 1 Kg

Maggi Tomato Ketchup 1 Kg

Heinz Tomato Ketchup 900 gm

Dairy Amul Butter 500 gm

Amul Taaza Toned Milk 1 L

Amul Processed Cheese 1 Kg

Beverages Nescafe Jar 100 gm

Society Tea 1 Kg

Brookebond Red Label Tea 1 Kg

Home Care Surf Excel Quick Wash 2 kg

Ariel Complete Detergent Powder 2 kg

Surf Excel Matic Top Load 1 L

Ariel Matic Top Load 1 kg

Personal Care

Shampoo Parachute Coconut Hair Oil 550 ml

Head and Shoulder Smooth and Silky 675 ml

Dove Hair Fall Rescue 340 ml

Sunsilk Stunning Black Shine 650 ml

TRESemme Smooth and Shine 580 ml

Soap Cinthol Lime Soap 4x100 gm

Lux Fresh Splash 3x150 gm

Dettol Soap 4x125 gm

Lifebuoy Soap Total 10 5x125 gm

Lifebuoy Handwash 750 ml

Pears Soap 3x125 gm

Toothpaste Closeup Deep Action Red Hot Gel Toothpaste 2x150 gm

Pepsodent Expert Protection Gum Care 2x140 gm

Patanjali Dant Kanti Dental Cream 200 gm

Dabur Red Toothpaste 300 gm

Colgate Swarna Vedshakti 200 gm

Colgate Calci-lock 500 gm

Page | 13


Imminent increase in cost of retailing + Online heat

+ Weak cash position warrants partnerships

Cost of retailing to inch up

Online grocery purchases are likely to increase during the pandemic as

consumers seek safety and convenience. This, in turn, is likely to put pressure on

the cost of retailing for the industry as an investment in online fulfilment

capabilities increasingly becomes imperative. Hence, top-up formats remain most

vulnerable as pricing/GM levers (typically sell low GM food/non-food FMCG-

heavy product mix) to manage profitability remain absent at a time when the cost

of doing business is likely to inch up.

A point to note is that most Indian B&M grocers, currently, have bare-bone

investments in the same given (1) weak cash position, and (2) risk of bleeding

further at the operational level. Hence, most would require partnerships with

stronger retailers or a significant fund raise to survive.

Only a few grocers make a profit spread


Most grocers haven’t managed to reduce cost of retailing materially over the last 4-5 years, pandemic is likely exude

more pressure


7

24 24 29

16

27

43

12 12 14 17 21 20 24

43

11 15

7

22 23 28

12

-

10

20

30

40

50

60

70

80

D-M

AR

T

FR

L

AB

RL

Sp

ence

rs

Sta

r

Rel

ian

ce (

Gro

cery

)

Sp

ar

Na

t B

ask

et

Wa

lma

rt I

nd

ia

Big

Ba

sket

Gro

fers

Met

ro

Bo

ok

er I

nd

ia

Vis

ha

l (B

2C

)

FY16 FY17 FY18 FY19 FY20

1518

28

1721

1520 19 20 22

10 10

39

-

10.0

20.0

30.0

40.0

50.0

D-M

AR

T

Rel

ian

ce (

Gro

cery

)

Big

Ba

za

ar

Ea

syD

ay

Sp

ence

rs

Vis

ha

l

AB

RL

Sta

r

Sp

ar

Na

ture

s B

ask

et

Wa

lma

rt I

nd

ia

Met

ro

Bo

ok

er I

nd

ia

E-t

ail

Stock-up retailers Top-up retailers B2B Online

Opex (As % of sales) Gross Margins (%)

Page | 14


Capex continues to outstrip CFO for most… …& Cash to scale remains low for most


Source: Company, HSIE Research, FY19 financials used for unlisted

retailers

Fund Infusion a must for most as cash cover remains

wafer-thin

Grocer-wise estimated Fixed cost base



Precarious working capital position warrants rationalisation for some grocers:

Some grocers continue to face working capital challenges as SKU management

remains weak. This may warrant a momentary shift in strategy from growth to

cash release. This trend may perhaps be exacerbated during the pandemic as

respective vendors may require support.

42.2

6.8 6.4 2.8 2.7 2.4 2.0 1.6 0.9 0.4

-5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

-

5,000

10,000

15,000

20,000

25,000

30,000

D-M

AR

T

Met

ro

Wa

lma

rt I

nd

ia

Bo

ok

er I

nd

ia

Sp

ence

rs

AB

RL

Vis

ha

l

Sp

ar

FR

L

Sta

r

Fixed Cost (Rs. mn) Cash Cover (in months) - RHS

-10 20 30 40 50 60 70 80 90

D-M

AR

T

Met

ro

Wa

lma

rt I

nd

ia

Bo

ok

er I

nd

ia

Sp

ence

rs

AB

RL

Vis

ha

l

Sp

ar

FR

L

Sta

r

FC (As % of Opex)

(5,000)

-

5,000

10,000

15,000

20,000 F

RL

Sta

r

DM

AR

T

Wa

lma

rt I

nd

ia

Sp

ar

Sp

ence

rs

Bo

ok

er I

nd

ia

AB

RL

Met

ro

Vis

ha

l (B

2C

)

CFO (Rs. mn) Capex (Rs. Mn)

36.3 32.2

2.7 2.3 2.0 1.3 0.8 0.6 0.3 0.1 0.1 -

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Rel

. Ret

ail

DM

AR

T

Met

ro

Wa

lma

rt I

nd

ia

FR

L

AB

RL

Sp

ence

rs

Vis

ha

l (B

2C

)

Sp

ar

Sta

r

Bo

ok

er I

nd

ia

Cash & Eq (Rs. bn)

Page | 15


FRL and Vishal Megamart continue to face SKU management issues, ergo, cash remains stuck in inventory; major

write-offs cannot be discounted


COVID19 pandemic will likely warrant additional support to vendors which may put additional strain on select

grocers (Payable days)


-

20

40

60

80

100 D

-MA

RT

FR

L

AB

RL

Sp

ence

rs

Sta

r

Sp

ar

Vis

ha

l Meg

aM

art

Wa

lma

rt I

nd

ia

Met

ro

Bo

ok

er I

nd

ia

Vis

ha

l (B

2C

)

FY15 FY16 FY17 FY18 FY19 FY20

-

20

40

60

80

100

120

140

D-M

AR

T

FR

L

AB

RL

Sp

ence

rs

Sta

r

Sp

ar

Vis

ha

l Meg

aM

art

Wa

lma

rt I

nd

ia

Met

ro

Bo

ok

er I

nd

ia

Vis

ha

l (B

2C

)

FY15 FY16 FY17 FY18 FY19 FY20

Page | 16


HDFC securities

Institutional Equities

Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,

Senapati Bapat Marg, Lower Parel, Mumbai - 400 013

Board: +91-22-6171-7330 www.hdfcsec.com

Disclosure:

I, Jay Gandhi, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about

the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our

compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC

Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication

of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.

Any holding in stock –YES

HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

Disclaimer:

This report has been prepared by HDFC Securities Ltd and is solely for information of the recipient only. The report must not be used as a singular basis of any investment

decision. The views herein are of a general nature and do not consider the risk appetite or the particular circumstances of an individual investor; readers are requested to

take professional advice before investing. Nothing in this document should be construed as investment advice. Each recipient of this document should make such

investigations as they deem necessary to arrive at an independent evaluation of an investment in securities of the companies referred to in this document (including merits

and risks) and should consult their own advisors to determine merits and risks of such investment. The information and opinions contained herein have been compiled or

arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty,

representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without

notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete. HSL is not obliged to update this report for such

changes. HSL has the right to make changes and modifications at any time.

This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident

or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation

or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction.

If this report is inadvertently sent or has reached any person in such country, especially, United States of America, the same should be ignored and brought to the attention

of the sender. This document may not be reproduced, distributed or published in whole or in part, directly or indirectly, for any purposes or in any manner.

Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or

the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

It should not be considered to be taken as an offer to sell or a solicitation to buy any security.

This document is not, and should not, be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report should not

be construed as an invitation or solicitation to do business with HSL. HSL may from time to time solicit from, or perform broking, or other services for, any company

mentioned in this mail and/or its attachments.

HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the

company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in

the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of

interests with respect to any recommendation and other related information and opinions.

HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any

action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs,

reduction in the dividend or income, etc.

HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the

report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this

report.

HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for

any other assignment in the past twelve months.

HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this

report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other

advisory service in a merger or specific transaction in the normal course of business.

HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the

research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our

Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are

inconsistent with and reach different conclusion from the information presented in this report.

Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject

company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report.

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East),

Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC

Securities Limited, SEBI Reg. No.: NSE, BSE, MSEI, MCX: INZ000186937; AMFI Reg. No. ARN: 13549; PFRDA Reg. No. POP: 11092018; IRDA Corporate Agent

License No.: CA0062; SEBI Research Analyst Reg. No.: INH000002475; SEBI Investment Adviser Reg. No.: INA000011538; CIN - U67120MH2000PLC152193

Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: > 10% Downside return potential

mailto:[email protected]

Sector Thematic Retail - Whose flywheel...Big Bazaar 40-45 Spencer's Retail 50 Star Bazaar/Market 20 Spar 60-70 Reliance Smart

Documents