My answer to "Difficult questions" --> please check?

Online groceries
New answer on Dec 03, 2019
2 Answers
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Enrico asked on Dec 02, 2019

Hello,

I have tried to answer to the section "Difficult questions", and wanted your feedback about my answers.

1. The first one, about liabilities when entering online groceries:

  • Margins are generally lower for online groceries
  • Distribution door-to-door is more expensive, and also requires new expertise (outsources vs in-house)
  • Customer loyalty tends to be lower (to be checked), because they don't shop nearby home anymore
  • Threats of new entry, as other players could follow the lead

2. Use existing infrastructure or buy new one? Risks?

  • Existing.
    • Advantages: limited-to-no investment; timing.
    • Disadvantages: capacity might be capped or almost; IT and distribution need to be developed
  • New.
    • Advantages: implement best practice from competitors; everything is designed for online operations and optimized accordingly.
    • Disadvantages: high investment (likely); timing is longer.

Please let me know what you think.

Thanks!

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Antonello
Expert
Content Creator
replied on Dec 02, 2019
McKinsey | MBA professor for consulting interviews

Ciao Enrico,
thanks for your answer, you added a good solution to the last part of the case. Only some points:
- I see the risk of new entry more as another incentive to enter as soon as possible in online groceries (if I wait others can anticipate us gaining all the market share)
- Use of existing infrastructure: there could be the risk of increasing operative costs, due to the saturation of capacity (need of paying extra-time to blue-collars, ...)
- New infrastructure: another advantage could be to build it in a tactical geographic position to optimize the logistics
- Other solution: you could even consider to outsource it to a competitor/regional player/some other company with available capacity

Best,
Antonello

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Kshitij
Expert
replied on Dec 03, 2019
12+ years in Strategy Consulting|EY|IBM|Inverto GmBH|Monitor|Accenture

Hi Enrico

Your answer are in the right direction. However, let try to refine it further to helps you arrive at an answer that wows :-)

There are two types of business models in online grocery business- Inventory based and Hyper local based and that's the set of lliabilities and infra requirements vary.

1. Intentory based : This is an expensive, integrated e-grocery model as it involves managing own warehouse with cold storage and a fleet of refrigerated trucks thus offering quality fresh groceries.

Liabilities : Huges Investment to Serve and Scale, Very High Working Capital, Risk of Wastage because grocerries are preshable items, and Higher operation cost accountable in terms of procurement, quality check, storage, inventory planning.

2. Hyper local based : Here companies do not own infrastructure, rather they are simple aggragators manging order and have tied-up with local stores for order fulfillment. With zero inventory and storage costs, the online aggregators just focus on customer acquition and branding/marketing.

Liabilities : Here the main liabilities are operaitonal eg. Quality and Timeliness for goods delivered

Hope these help you determine the liabilities associated with different business models.

Coming to your second question whether to buy or use an existing business model completely depends on the business model and future roadmap. Here are few points that might help decide which on the risks associated with each :

1. Existing Infra : Esxisting Infra would fail if it can not be scaled as per the volumetric/transactional requirements. Exisitng infra is not competent to new services and partner integration

1. New Infra : You would need a new infra if there is an expected change or evolution in business model and services both from regulatory and operational point of view eg. loyalty management driven cross industry partners, new services like grocerry wallet (pay and earn throgh wallet).

Hope these help. Please feel free to connect if you want ideas and insights into new business models.

Cheers

Kshitij

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Antonello

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McKinsey | MBA professor for consulting interviews
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