Why India’s Online Grocery Battle Is Heating Up
Earlier this year, India’s largest e-grocer,
BigBasket, received $300 million in funding led by China’s e-commerce giant,
Alibaba. This is the biggest investment raised by the company since it started
operations in 2011 and values it at around $950 million. BigBasket cofounder
and CEO Hari Menon says the money will be used for “Growth. Growth. Growth.”
According to Menon, BigBasket’s backend is “a well-oiled engine.” The
investments over next 18 months, he says, will be in marketing, infrastructure
expansion and technology like user interface improvements and advanced
analytics.
This growth will translate to two key
numbers, says Menon. Rs. 300 crore ($45 million) revenue in the month of
September 2018 and Rs. 500 crore ($75 million) revenue in March 2019. “This
will take the company to an exit revenue run rate of Rs. 6,000 crore ($900
million). We are advancing this goal by one year,” he adds.
Menon’s haste is not surprising. There is a
big battle brewing in India’s e-commerce market. For over a year now, there has
been talk of Walmart, the world’s largest retailer, taking a stake
in India’s largest e-tailer, Flipkart. The buzz has grown.
There is also talk of the global e-commerce giant Amazon, which is currently
the second largest e-tailer in India, wanting to get a piece of Flipkart. While
all three refuse to comment on speculations, media reports suggest that the
deal between Walmart and Flipkart will be sealed soon. If it goes through, as
expected, it will give Walmart a strong foothold in India, one of the fastest
growing e-commerce markets globally. For Flipkart, it will mean additional
arsenal against Amazon, which is betting big on India. One area that is
expected to see a huge impact with any redrawing of the battle lines is online
groceries.
“Grocery is the largest consumer segment by
far; Indians spend more than 50% of their monthly income on groceries. It’s a
must-capture space for all retailers, be it offline or online,” says Harminder
Sahni, founder and managing director of consulting firm Wazir Advisors.
“Grocery is a very hyper-local business. It is the logical next step for
e-tailers once they have set up a strong delivery system and have a strong
customer base,” says Sreedhar Prasad, partner, business consulting at KPMG
India.
Grocery retail in India is estimated to be
over 60% of the country’s total retail market. Analysts peg it anywhere between
$400 billion to $600 billion at present with the potential to cross $700
billion by 2022. Online grocery is still small, but analysts see it as having
huge potential. It is estimated to be around $500 million to a little over $1
billion currently and expected to cross $3 billion to $5 billion or even much
more over the next three to four years.
It’s not just the size of the grocery pie
that is attractive to e-tailers — it’s the stickiness. Groceries (and
vegetables and fruits) are an essential purchase for every household. They are
bought frequently and with a high repeat rate. Customers typically buy them
without giving too much thought. The player that can capture the lion’s share
of a customer’s mind share and wallet share in groceries can have a sharp edge
over others; it can become the default e-tailer for other purchases, too.
Anindya
Ghose, professor of information, operations,
and management sciences and professor of marketing at New York University’s
Stern School of Business, points out that even for online grocers, roughly
one-third of their sales come from “non-food items” such as cleaning supplies
and beauty products. In the real, bricks-and-mortar world, this number is about
15%. Ghose adds: “Online grocery typically attracts the most profitable
customers: dual-income households, customers who prioritize convenience over
price, and customers with high lifetime value. These are the kinds of customers
e-commerce retailers should care about.”
The Amazon Factor
Take Amazon. The company’s stated vision is
“to transform the way India buys and sells.” It also wants to be the ‘everyday’
and ‘everything’ store for its customers. “We see groceries as an important
category to make e-commerce a part of the Indian customers’ everyday lives.
Therefore, we decided to make grocery shopping more convenient and hassle-free
for our customers,” says Sameer Khetarpal, director – category management at
Amazon India.
Amazon launched its grocery offering in June
2016 with the Amazon Now app in Bangalore. (This started as a pilot in 2015 and
was then called Kirana Now.) Through this app, customers can order a range of
products — including fruits and vegetables, groceries, household essentials and
personal care — and have them delivered within two hours. Last year, Amazon
expanded this service to three more cities – Mumbai, Delhi and Hyderabad.
Amazon has another format called Amazon Pantry which is available in 40 cities.
Here, customers can order on the Amazon website and the products are delivered
the next day.
“Amazon Pantry focuses on weekly and monthly
stock-up shopping with a strong emphasis on increased savings to the
customers,” says Khetarpal. In March, Amazon launched a network of 15
specialized fulfilment centers specifically for daily essentials to increase
the speed of delivery. These fulfilment centers are equipped with
temperature-controlled zones, a first for Amazon in India, to store and deliver
perishables and frozen products.
Amazon’s programs for the grocery segment
include “Super Value Day” and “Subscribe and Save.” The former, which takes
place on the 1stand 2nd of every month — in line with customers’
habit of monthly grocery shopping on the first two days of a month — offers
extra discounts. The Subscribe and Save program, where customers can create
subscriptions for regularly bought items, offers both savings and convenience.
These two options are available to Amazon customers across the country.
The company has also got the Indian
government’s approval for a proposal to invest $500 million in food retail in
the country. The approval allows Amazon to open fully-owned brick-and-mortar
stores to sell food products in India. Satish Meena, senior forecast
analyst at research firm Forrester, says cracking the grocery market is tough
without an offline presence and expects Amazon to invest in an offline grocery firm
in India. This would be in line with its acquisition
of Whole Foods in the U.S. last year.
Flipkart is also reported to be eyeing the
grocery space keenly. A few months ago, it did a soft launch for grocery
delivery called “Supermart” on its mobile app for customers in Bangalore. This
is Flipkart’s second attempt in this category. In 2015, it tried delivering
groceries from neighbourhood stores, but that didn’t work out and Flipkart
quietly exited. At present, the company is tight-lipped about its plans.
Industry experts feel it is waiting to strike the deal with Walmart before
making a big splash. “To remain the number-one online retailer in India,
Flipkart is looking to expand beyond smartphones and fashion. The deal with
Walmart can provide Flipkart the expertise of running offline stores, access to
sellers and manufacturers, supply chain and the know-hows of selling
groceries,” says Meena.
Expanding the Basket
BigBasket’s Menon claims to be unfazed by the
looming threat. Competition, he says, will only grow the market. “Online
grocery needs more players. It’s not easy, especially in the grocery segment,
to move customers from the physical world to the online world. When the noise
levels increase, more customers will move online. And with more players
coming in, the market will expand rapidly.”
Menon believes BigBasket is in a strong
position. It currently delivers around 70,000 orders per day across 25 cities,
of which two (Bangalore and Hyderabad) are operationally profitable. Three more
cites (Chennai, Ahmedabad and Kolkata) are expected to become profitable in the
next quarter, and the rest are slated to be operationally profitable by year
end. For the year ended March 2017, the company’s revenue was Rs. 1,400 crore
($211 million). For 2017-2018, Menon expects it to be over Rs. 2,100 crore
($317 million).
Menon lists “strong connect with the farmers,
fresh produce (fruits and vegetables),wide range of groceries at very
competitive prices, great quality, differentiated private label products,
well-oiled and established supply chain and last mile delivery tailored to the
grocery business,” as BigBasket’s key strengths and differentiators.
Interestingly, close to 40% of BigBasket’s business is from private labels.
This brings in much higher margins than is typical in the grocery business.
The e-grocer’s two recent initiatives are a
foray into the physical world through vending machines in residential
apartments and office complexes, and offering a subscription model for products
like fresh milk. Both are being piloted at present. Menon plans to install
10,000 kiosks over the next 24 months. Each machine, he says, will be unmanned
and will have 24 to 48 products depending on the size of the apartment and
office complex. The products will be daily essentials like fruits and
vegetables, bread, eggs, dairy products, juices and snacks. These new moves are
expected to increase the frequency of buying by customers. “Our vertical focus
on the grocery segment helps us in becoming the destination of choice for
online grocery buying. We will continue to remain focused on grocery and all
our investments in supply chain, technology and infrastructure will remain in
the grocery segment,” says Menon.
Will its vertical play help BigBasket to
fight biggies such as Amazon and a Walmart-backed Flipkart? Currently, it is
the market leader in e-grocery in India followed by Grofers — another vertical
player with strong investors like the Japanese conglomerate SoftBank. Amazon is
trailing in the third place. The Alibaba-backed Paytm Mall is also looking to
increase its presence in grocery. In an interview with business daily Business
Standard, founder and CEO Vijay Shekhar Sharma said he is looking to
increase the contribution of the grocery business from 25% at present to 40% by
the year end. Then there are a few city specific e-grocers like DailyNinja in
Bangalore and Kada in Trivandrum. Over the past couple of years, some high
profile e-grocers like PepperTap and LocalBanya have closed shop.
Ankur Bisen, senior vice president at
management consulting firm Technopak Advisors, says Walmart’s proposed
investment in Flipkart will be “a significant development,” but he expects that
“for the next three years the space of Indian online grocery will continue to
grow in the current construct.” Bisen explains: “Marketplaces world over
usually struggle to make grocery e-commerce work. It has always been a vertical
specialist, like Ocado in the U.K., to emerge as a category creator. The
nuances and challenges of grocery e-commerce demand a specialist play that
can’t be extracted from a generic marketplace model.”
The fact that the top two e-grocers in India
are both vertical players, he says, validates that online grocery retailing is
more challenging than it may appear. Bisen adds a caveat though; the
situation may not remain the same going forward. “Leading e-commerce players
understand these challenges and are throwing capital behind technology, improvisations
and acquisitions to get online grocery right.”
Kartik
Hosanagar, Wharton professor of operations,
information and decisions, is bullish on BigBasket. Hosanagar has visited the
company’s warehouse twice and says he is “impressed with its ventilation
system, thermal protection systems, warehouse layout and product
classification.” Hosanagar lists BigBasket’s supply chain efficiency, delivery
system and customer analytics as its key strengths. For instance, BigBasket’s
“inventory write-offs at 0.5% of gross revenue,” Hosanagar says, is
“exceptional for an e-commerce business in India.”
Beyond Discounts
Hosanagar believes that Amazon’s usual
strategy of increasing market share by deep discounting won’t be easy in
groceries. First, margins are too low to be able to do that. Second, the big
FMCG brands in India, he says, are likely to resist such efforts. According to
Hosanagar, “while analytics and existing infrastructure” are huge advantages
for Amazon, it doesnt have “as deep an understanding of groceries as the
BigBasket folks, who have spent a lifetime in the industry they started.”
(BigBasket cofounders were part of the founding team of Fabmart, one of India’s
first e-commerce firms, in 1999.)
Hosanagar explains: “The grocery business is
extremely challenging. Given its low margin nature, there is little room for
mistakes or inefficiency. Winning in this market requires deep understanding of
the grocery business, a highly efficient supply chain, low return rates, and
sophisticated use of technology to both manage the supply chain and retain
customers.” KPMG’s Prasad points out that unlike other categories, grocery is a
local play and has to be built “city-by-city.” Adds Stern’s Ghose: “The
logistics complexity and costs increase exponentially with assortment depth,
and the customer will hardly pay that premium.”
According to Wazir’s Sahni, his mantra for
success in this market is “long-term patient capital and robust and efficient supply
chains.” He points out that unlike in U.S., where e-tailers have to take share
from large format organized retailers, in India it is the small kiranas (neighborhood
shops) that rule the market. “They thrive on a fragmented supply chain and
micro markets. This is a tricky animal for online retailers to deal with.”
Technopak’s Bisen points out that grocery is need-based shopping, and consumers
look for convenience, price and choice. It is not an aspirational purchase that
allows consumers to overlook these factors. According to Bisen, the very nature
of this segment does not allow for the marketplace or aggregation model. “It
needs an inventory model that allows complete visibility on the merchandise.”
Forrester’s Meena thinks otherwise. He says
it will be difficult for pure-play e-grocers to compete against horizontal
players like Amazon and Flipkart, which can “find ways to cover for the low
margin category by selling other goods to the households.” He expects BigBasket
to go for consolidation with an online or offline player.
Ghose is of the same view. Citing Amazon, he
says it has made its mark in this space with the Whole Foods acquisition, and
will “continue to destroy its competitors” by undercutting them on price.
“Amazon has deep pockets to absorb these losses, but the other players will not
be able to afford such drastic price competition for too long. This will force
them to go out of business or make them likely targets for acquisition.”
KPMG’s Prasad, however, feels that the Indian
e-grocery market is still nascent enough for both horizontal players and
pure-play e-grocers to co-exist successfully. “Consolidation may happen later,
but I don’t see it happening in the near future,” he says.
Last month, Grofers got a funding of Rs. 400
crore ($60 million) from SoftBank and the New-York-based fund Tiger Global
(both were existing investors), and Yuri Milner, a Russian tech billionaire.
This funding valued Grofers at $300 million — a drop of 20% as compared to its
previous round of funding in 2015 when it raised $120 million. According to
media reports, last year Grofers was looking to merge with BigBasket. There was
also speculation of Flipkart acquiring Grofers. In a recent media interview,
Grofer’s co-founder and CEO Albinder Dhindsa said they want to be independent,
for now. Will the Walmart-Flipkart deal, if it happens, make them change their
minds?
http://knowledge.wharton.upenn.edu/article/indias-online-grocery-battle-heating/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2018-05-01
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