Online Groceries in India: Will
Consumers Bite?
U.K.-based Ocado, the
world’s largest online grocery firm (or e-grocer), recently posted its first
ever full-year profit. Ocado, which started operations in the year 2000,
reported a pre-tax profit of £7.3 million ($11 million) on revenues of £948
million ($1.4 billion) for the 52 weeks ended November 30, 2014. In 2013, it
reported a loss of £12.5 million. It has taken the company 15 years to deliver
on its promise
In India, BigBasket,
the country’s largest e-grocer which began operations in 2011, expects to break
even in the next 36 months. It is already operationally profitable in its home
market, Bangalore. “Labor and logistics costs are much cheaper in India than in
western markets, so e-grocers here can make money faster,” says Hari Menon,
BigBasket’s cofounder and CEO.
BigBasket currently
has a kitty of over 10,000 products across 1,000 brands and over 450,000 active
customers across five cities. It expects to close financial year 2014-2015 with
revenues of around Rs. 250 crore (US$40 million). By December this year, the
company plans to expand its presence to around five more cities. And over the
next two years, it expects to grow to Rs. 1,800 crore (US$288 million).
India is the sixth largest
grocery market in the world and one of the fastest growing markets for online
groceries. According to industry estimates, of the $500 billion-plus retail
market in the country, food and groceries account for the biggest chunk with
around 70% market share. Of this, organized food and groceries is estimated to
be around $12 billion and growing at a compound annual growth rate of around
30%. Research firm IGD predicts that by 2016, the Indian grocery market would
have overtaken Japan to become the third largest. Meanwhile, India’s online
grocery market, which is estimated to be less than $100 million at present, is
expected to be worth billions in the coming years. “We anticipate it to cross
$20 billion by 2020,” says Menon.
A 2014 U.S. Department
of Agriculture (USDA) report notes that “the growth in India’s online retailing
for food and groceries is a function of the rise in total Internet users from
120 million to 213 million in the past year as well as a fall in mobile handset
prices and a rise in smartphone penetration.” Nitish Asthana, general manager
at electronic payment firm First Data, adds that as consumers get more
comfortable shopping online, they move to newer categories. “Consumers with
busy lifestyles are opting for online grocers. We believe that the key point is
the quality and range of products being offered at an attractive price and
without the customer having to step out the door.”
Packed
with Action
The potential is
attracting a flurry of attention and action. Even as pure-play domestic
e-grocers like BigBasket, ZopNow and LocalBanya are expanding their operations,
horizontal e-tail biggies like Flipkart and Snapdeal have added gourmet and
specialty food to their offering. Importantly, so has the global e-tail giant
Amazon, which created waves last year when CEO Jeff Bezos announced a $2
billion investment for India.
“We launched the
gourmet and specialty food store in October last year on Amazon.in. This is a
reiteration of our commitment to relentlessly focus on building a place where customers
can find, discover and buy virtually anything they want to buy online,” says
Samir Kumar, director – category management at Amazon India. Pointing out that
online grocery shopping in India is currently nascent, he adds: “We see
potential in it, particularly for niche products like gourmet, organic food and
specialty products which are not easily available. Customers should expect us
to continue investing in expanding selection in this category.”
Amazon has been moving
fast. In March this year, it launched Kirana Now, an express
delivery platform in partnership with neighborhood stores. According to Amit
Agarwal, vice president and country head of Amazon India, this is an “India
specific innovation built particularly for the local market.” In a conversation
with daily newspaper Times of India, Agarwal said: “These
corner stores, which would be listed as sellers, will upload their catalogues
online on our platform and we would help with the backend and technology.”
Amazon’s entry is
expected to step-up action in the segment. “With Amazon’s deep pockets and
experience with Amazon Fresh, it will [pose] a big challenge for BigBasket and
other local firms,” says Kartik Hosanagar, an operations and information management
professor at Wharton. Pragya Singh, associate vice president of retail at New
Delhi-based research and consultancy firm Technopak Advisors, adds: “The entry of a player like Amazon
will definitely pose a challenge for the incumbent players Twitter . However, food and grocery is relatively
more complex than other categories. It will be interesting to see how
competition in this space unfolds as more players enter it.”
It’s
not just e-commerce players who want a piece of this pie. Leading
brick-and-mortar Indian retailers like Reliance, Future, Godrej and the Aditya Birla groups are also making their
moves.
For instance, in
January this year, Godrej’s gourmet food chain Godrej Nature’s Basket which
went online two years ago, tied up with Snapdeal and has listed over 700
products on it. In a press statement Mohit Khattar, managing director of Godrej
Nature’s Basket, said: “We are thrilled to partner with Snapdeal.com. This is a
huge opportunity for the brand to connect with all discerning customers who are
currently not serviced by our offline and online formats.” Godrej Nature’s
Basket, which was started in 2005 as a single store and has grown to 33 stores
across multiple cities, has recently also acquired Mumbai-based e-grocer
EkStop.
Venture capitalists,
too, are upbeat on this space with BigBasket being the most favored one. The
company has so far received around $60 million from various investors including
Bessemer Venture Partners, Ascent Capital, Helion Ventures, Zodius Fund and
LionRock Capital. According to Venture Intelligence, a research services firm
focused on private equity and M&A deals, ZopNow’s investors include Accel
India and Qualcomm Ventures while EkStop has received funding from Jungle
Ventures and Unilazer Ventures. LocalBanya, which has raised $20 million so far
in three rounds from Springboard Fund, realtor Karmvir Avant Group and others,
is now reported to be looking to raise another $15 million.
A
Different Recipe
Technopak’s Singh says
that with nearly two-thirds of the retail market being food and grocery, it
won’t be surprising if even more players eye this space. However, she adds a
note of caution: Online grocery needs to be approached with a different level
of preparedness. “The approach to online grocery needs to be more localized and
hence their sellers and processes need to be aligned to local fulfilment. This
is a different ball game than what is done in other categories.” Singh also
believes that while the “traction in larger cities has been encouraging so far,
for smaller cities the case still needs to be built.”
Snapdeal’s cofounder
Kunal Bahl points out that supply chain, specifically temperature controlled
storage, transport and delivery systems play a “pivotal role” in making the
gourmet e-commerce ecosystem viable. “India has just begun to work in this
direction and it will take time to move beyond the metro cities and reach the
vast segment which has high purchasing power but lives in tier 2 and tier 3
cities,” he says.
According to Wharton’s
Hosanagar, a key challenge is that grocery is a low-margin business. Specialty
foods, he says, is better from a margin standpoint, but it still does not have
the economics of, say, the apparel industry. “On top of it, there are logistics
challenges, and the business needs a lot of capital investment. For it to be
economically viable, one needs cart sizes that are big enough. This means that
the product offering has to be broad. A [further] challenge in India is that
since kirana [neighborhood] stores drop off groceries at home
for no fee, grocery shopping isn’t as inconvenient as in the U.S. So the value
proposition is a little weaker in India.”
K. Ganesh, serial
entrepreneur and co-promoter of BigBasket, disagrees. Physical grocery retail
in India, he says, is “broken and dysfunctional because of problems of high
rentals, high shrinkage and high inventory costs.” And while Ganesh concedes
that neighborhood stores do offer the advantage of quick home delivery, he
points out that because of their very nature, these stores have limited
offerings. “Most consumers have to do a fair bit of their grocery shopping at
department stores. Heavy traffic on the roads and lack of adequate parking make
this a very stressful experience. Put all this together, and there is a
compelling case for e-grocery in India.”
Adds Menon of
BigBasket: “If you look at the grocery buying pattern in the country, a typical
urban Indian household does the bulk of its grocery shopping on a monthly
basis. This is done primarily at department stores which offer variety and
discounts. The shopping at neighborhood stores is mainly for top-ups.
What we are targeting
at present is the shopping done in the larger stores. Over time, we hope to
offer express delivery — within an hour or two — and get a share of the
neighborhood stores also.” According to Menon, customers at BigBasket purchase
at an average of 2.6 times a month. Through the use of analytics, Menon wants
to push this up to four times a month. “It’s ambitious and requires a huge
change of habit in our customers. But we believe that we will definitely get to
three visits in six to eight months from now,” he says.
Margins
Game
Ganesh and Menon also
counter the argument about low margins in this business. According to them,
margins can be as high as 22%. But this, they say, requires strong domain
expertise in order to source and grade the products, as well as going deep into
the supply chain and building strong relationships with farmers and mill owners
and FMCG companies. “Building one’s own brand is also critical,” says Ganesh.
He adds that unlike a horizontal play, where you can ship from a central
location to the whole country, food and groceries is an extremely localized
business. “One needs to understand the local nuances. It’s all about building
local relationships, local buying, local logistics and building the business
city by city.”
Do large
brick-and-mortar grocery chains have an advantage in their onlineavatars?
Not necessarily, says Singh of Technopak. “Their DNA is completely different.
Just because you have inventory doesn’t mean you will succeed online. This
business requires very different capabilities like expertise in analytics, digital
marketing and so on. It also requires tremendous process discipline and lots of
investment in technology.” Talking to daily newspaper The Economic
Times, Amit Bhartiya, advisor at LocalBanya, noted that “offline
players going online cannot make a mark if they do not offer competitive
pricing and value.”
The jury is still out
on what is the best model for this category in India. “A marketplace model that
brings together a variety of sellers offering an assortment of products is most
suited for this segment,” says Snapdeal’s Bahl. “The established offline stores
can expand their reach through the e-commerce channel without actually having
to build it. They have the expertise in handling such products, and
marketplaces like ours have expertise in connecting them with customers outside
their natural geographic markets.”
LocalBanya’s cofounder
and CEO Karan Mehrotra points out that his model doesn’t require much
infrastructure. In an interview with daily newspaperBusiness Standard,
he says: “We connect with existing retailers and grocery stores. We do not
compete with them. We work with them, adding the online channel to the existing
vertical.” Ganesh thinks this category needs an inventory-led model. “Some of
the players buy from large stores and supply to their customers, but this is
not scalable,” he says, adding that since the ticket sizes are small, scale is
critical to be successful in this business. BigBasket itself holds a 10-day
inventory for all its products, except for fruits and vegetables. For these, it
holds an inventory of less than two days.
What no one disputes
however is the headroom for growth in the sector. “The more the number of
players who enter this segment, the faster will be the growth,” says Bahl. He
is also not worried about a player like Amazon with deep pockets and global
expertise. Echoing the sentiments of others in the industry, Bahl says: “India
is a very diverse country and a complex market. The effectiveness and
efficiency in adapting to the Indian markets will define how any company will
fare here.” Adds Karan Maheshwari, one of the early angel investors in EkStop:
“Right now, it’s a growing market and there is a place for everyone. But in
time we will see a shakeout and mergers and acquisitions.” Some of that has
already started.
http://knowledge.wharton.upenn.edu/article/online-groceries-in-india-will-consumers-bite/
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