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
+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
+91-22-6171-7320
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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
Retail : Sector Thematic
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
Retail : Sector Thematic
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
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Consumption (US Bn) Consumption share (%)
Page | 5
Retail : Sector Thematic
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
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15
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25
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15
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23
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29
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4-J
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12
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19
-Ju
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27
-Ju
n
4-J
ul
11
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Grocery
(18.0)
(15.0)
(12.0)
(9.0)
(6.0)
(3.0)
-
14
-Ma
r
22
-Ma
r
28
-Ma
r
7-A
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15
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r
25
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8-M
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15
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23
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29
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4-J
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12
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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
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1-M
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8-M
ay
15
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23
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29
-Ma
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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
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1-M
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8-M
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15
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23
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29
-Ma
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4-J
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12
-Ju
n
19
-Ju
n
27
-Ju
n
4-J
ul
11
-Ju
l
Home Care
Page | 6
Retail : Sector Thematic
DMART’s weekly discount trends in Personal Needs WC 14-Mar: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
WC 22-Mar: DMART’s discount edge over Peers WC 28-Mar: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
WC 07-Apr: DMART’s discount edge over Peers WC 15-Apr: DMART’s discount edge over Peers
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
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15
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25
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8-M
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15
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23
-Ma
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29
-Ma
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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
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Am
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Pa
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Fli
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art
Sp
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Sp
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Rel
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ma
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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
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y
Fli
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art
Sp
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Sp
ar
Sta
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az
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Rel
ian
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ma
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Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
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Am
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on
Pa
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Fli
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Sp
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Sp
ar
Sta
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az
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Rel
ian
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ma
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Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
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Fli
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art
Sp
ence
rs
Sp
ar
Sta
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az
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Rel
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ma
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Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
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
Home Care Personal Needs
Page | 7
Retail : Sector Thematic
WC 25-Apr: DMART’s discount edge over Peers WC 01-May: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
WC 08-May: DMART’s discount edge over Peers WC 15-May: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
WC 23-May: DMART’s discount edge over Peers WC 29-May: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
(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
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art
Sp
ence
rs
Sp
ar
Sta
r B
az
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Rel
ian
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ma
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Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
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Rel
ian
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ma
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Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
rtGrocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
Page | 8
Retail : Sector Thematic
WC 04-Jun: DMART’s discount edge over Peers WC 12-Jun: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
WC 19-Jun: DMART’s discount edge over Peers WC 27-Jun: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
WC 02-Jul: DMART’s discount edge over Peers WC 10-Jul: DMART’s discount edge over Peers
Source: Company, HSIE Research
Source: Company, HSIE Research
(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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
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
Grocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
(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
rtGrocery Packaged Food Dairy & Bevarages
Home Care Personal Needs
Page | 9
Retail : Sector Thematic
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
Source: Company, HSIE Research
Source: Company, HSIE Research
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
Retail : Sector Thematic
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
Source: Company, HSIE Research
-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
Retail : Sector Thematic
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
Retail : Sector Thematic
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
Retail : Sector Thematic
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
Source: Company, HSIE Research
Most grocers haven’t managed to reduce cost of retailing materially over the last 4-5 years, pandemic is likely exude
more pressure
Source: Company, HSIE Research
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
Retail : Sector Thematic
Capex continues to outstrip CFO for most… …& Cash to scale remains low for most
Source: Company, HSIE Research
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
Source: Company, HSIE Research
Source: Company, HSIE Research
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
Retail : Sector Thematic
FRL and Vishal Megamart continue to face SKU management issues, ergo, cash remains stuck in inventory; major
write-offs cannot be discounted
Source: Company, HSIE Research
COVID19 pandemic will likely warrant additional support to vendors which may put additional strain on select
grocers (Payable days)
Source: Company, HSIE Research
-
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
Retail : Sector Thematic
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:
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Rating Criteria
BUY: >+15% return potential
ADD: +5% to +15% return potential
REDUCE: -10% to +5% return potential
SELL: > 10% Downside return potential