Can India’s Digital Grocery Players Sustain The Covid Boom?

Online grocery is a tough nut to crack. Extremely low margins and struggles to maintain scale amid changing consumer trends, environmental factors and the greater degree of difficulty when it comes to fulfilment — it’s pretty much a challenge at every step.

As Willy Kruh, global chair, consumer & retail business at KPMG International says, “Very few retailers get their online grocery model right, but when they do, it can be very successful.”

In the last few years, we have seen the likes of Bigbasket, Grofers, FreshToHome, MilkBasket among others looking to conquer this sector. With their undying hunger to innovate, integrate technology, build one product after another while facing price wars to maintain the market share yet create revenue streams, these players have been leading the pack. In close competition there have been other players such as Amazon and Flipkart Supermart and hyperlocal delivery startups such as Dunzo among others, but these never really challenged Bigbasket, Grofers & Co for grocery delivery. But as the pandemic showed, there’s room for at least a dozen more players in the Indian market and this has brought unprecedented focus on the grocery delivery industry.

Once the lockdown came into play from March 25, 2020, existing grocery delivery players faced a string of challenges in maintaining supply chains and building up capacity to fulfil demand. Moreover, the model of warehouses and dark stores was not favourable at this time as transport was severely hampered. The build-up of inventory, lack of manpower and consumer fears also made things worse. If scale was the motivation, it also became a fear for many. This kerfuffle resulted in the entry of new grocery delivery services, while existing ecommerce and retail discovery players stepped in for last-mile demand.

The great big Indian grocery delivery rush had well and truly begun with Zomato and Swiggy expanding into grocery delivery, while Dunzo stepped up competition with its vast network of stores and quick delivery fleet. Others also joined in to cash in on the opportunity. But as quickly as the peak, came the troughs and the realisation that despite the high demand and the perfect market timing, grocery delivery is a tough nut to crack — perhaps the toughest.

“As high is the opportunity in online grocery, so are the risks of being a low margin business. A few things going wrong can make a player burn a lot of money,” says Blume Ventures’ Arpit Agarwal.

Over the past decade, the India online grocery sector has gone through plenty of tumult. According to research by DataLabs by Inc42+, the online grocery market is expected to spike to $10.5 Bn, or 1.2% of the overall retail market by 2023. Enabled by technology, affordability of smartphones, increasing internet penetration and the rising need for convenience in the urban and semi-urban markets, the sector has attracted hundreds of startups that have together raked in over $1.7 Bn from investors from 2011 till June 2020.

While 2014-15 was the era of me-too startups and the funding trajectory was positive indeed, 2016-17 was termed as the graveyard phase with the most number of shutdowns or startups scaling back including giants like Flipkart, Grofers, Bigbasket among others. But thanks to the integration of supply chain technology, introduction of dark store models, innovation in delivery models plus the increased traction from direct to consumer (D2C) channels, the subsequent years witnessed somewhat of an uptick for online grocery, making it one of the key growth sectors in India.

Incidentally, online grocery players found the revenue groove as well during the pandemic. Unlike grocery delivery or ecommerce, the crisis showed that the Indian consumer could be forced to buy online without discounts — pay for the convenience factor so to speak. In the last three months, the segment has emerged as the most sought-after in terms of income. According to a June 2020 RedSeer report, the GMV in May was up by 45% as compared to January. Further, US-based market research company Forrester Research noted that India’s online grocery market could make $3 Bn in sales this year, representing a whopping 76% hike compared to $1.7 Bn last year. The research firm has attributed this growth to the demand of fresh produce and staples during the nationwide lockdown.

The lockdown period also marked the entry of more than 15 new players both from the online and offline retail section (short term for few, perhaps). The list included Zomato, Swiggy, Meesho, Ninjacart, Dunzo, Snapdeal, Perpule, Club Factory (before the ban in India), Dominos, Google Pay, Quikr, ITC and others. The entry of JioMart was another major game-changer in the segment, and though the Reliance Jio company is only still finding its feet in the market. Most players need to be extremely wary of Jio’s massive capital reinforcement in recent months as well as the partnership with Facebook, both of which will be key to determining JioMart’s success. 

With the boom came speculation around Paytm Mall acquiring MilkBasket, and Zomato acquiring Grofers. But while consolidation may yet play a role in the segment, the current mood is of bullishness. Even investors are backing grocery plays in a big way. Just last month, Gurugram-headquartered hyperlocal delivery startup Milkbasket has raised $5.5 Mn in fresh funding led by Inflection Point Venture with participation from existing investors — Blume Ventures, Kalaari Capital, Mayfield India, Unilever Ventures and BeeNext. 

In early April, Bengaluru-based BigBasket raised $60 Mn from existing investor Alibaba to meet the upsurge in demand for essential products and grocery.

But beyond the rising investor interest and consumer demand, there’s a feeling that this boom for grocery apps is just fleeting. 

Can the new players and the legacy retail giants create a long-lasting impact or will these new efforts fizzle out in the long run as sustainability and scale come into question?

The New Vs Old: How Consumer Behaviour Shaped Egrocery

If online grocery in pre-Covid times was about discounts, in the post-Covid era, it has become more about safety and convenience, for which consumers are even willing to pay. Ashish Sharma, MD & CEO, InnoVen Capital said that the consumer preference for low-touch delivery models has led to higher average order values and new user acquisition. “While some demand will go away once a vaccine is in place and consumers start feeling safe to venture out but many customers will stick around. This is like a “demonetisation” moment and may very well do what demonetisation did for the payments industry,” Sharma added.

However, there is an ongoing debate on whether the new players — whether startups or corporates — can impact a significant strategy change for the existing grocery delivery startups. Most experts believe that existing players such as Bigbasket, Grofers will not suffer from consumers choosing rivals and will remain focussed on enhancing their own capacities, supply chains and adding new capabilities, despite the rising competition forcing a battle for mindshare among brands.

“The overall market size is increasing, which is net positive. Existing players are busy hiring/ training staff, building infrastructure and signing up new partners. Plus we expect, the market share of existing players will increase as they are in the best position to capitalize on this opportunity while offline retailers have to play catch up and build capabilities,” added Innoven’s Sharma.

The period between March and May brought unprecedented growth for the online grocery segment. To get a glimpse of user behaviour, Inc42 partnered with AppTweak to understand how these grocery apps have grown over the past few months. The data analysis does not include the new players launched in 2020, except for some foodtech startups such as Zomato and Swiggy which introduced grocery delivery during the lockdown. Further, most new players added grocery as a horizontal category like Zomato and Swiggy, but did not have separate apps and thus, these are not included in the analysis. However, given the huge user base commanded by Zomato and Swiggy, their horizontal play in grocery is still large enough to warrant a look.

Retail Giants Show Great Traction

As per the daily download growth for online grocery apps from 1st March to 30th May, we can see that Dmart Ready, the online grocery delivery app of retail giant Dmart which was launched in 2018, has had the biggest jump with a whopping 13948.1% growth in traction. This is significantly higher than Bigbasket, which saw the biggest jump among digital platforms and whereas Paytm also saw a healthy increase in traction for grocery delivery. Besides Dmart, Spencer’s and Domino’s also attracted a high number of downloads during the lockdown period, according to AppTweak data.

Grocery Apps Visibility Drops By End Of May 2020

AppTweak data also indicates a fall in ‘app power’ or app store visibility for Bigbasket (-4.39%), Grofers (-9.78%), Swiggy (-10%), Amazon Prime (x%) and Milkbasket (-26%) from December 2019 to May 2020. Surprisingly, Dmart Ready emerged at the top with 17% increase in visibility.

This indicates that the consumers are looking for alternatives and are experimenting with legacy brands coming online. Could this be a sign of customer loyalty moving with the business from retail to online? In the near future, this growth in traction could signal towards a change in power centre as well, if large-format grocery retailers continue to build on their tech capability.

Bigbasket Failing To Woo Consumers

Bigbasket, which is said to have the largest market share in India so far, is easily a cut above the legacy players when it comes to technology adoption. BigBasket and Grofers are said to together hold a 70% market share, according to Redseer. However, between March and May 2020, Bigbasket has lost out on the visibility front on the Google Play Store in comparison to players such as Grofers and Dunzo.
Based on the downloads per day on the first day of each month this year as well on May 31, 2020, Bigbasket’s per-day app downloads dropped by 38%. Similar is the case for Swiggy (81%), Zomato (62%), Dunzo (85%), and Amazon Prime (93%).

A big reason for the drop in downloads could be the several supply chain challenges that Bigbasket faced in the early days of the lockdown leading to cancelled orders and lack of delivery slots. Since many delivery partners returned home due to the lockdown, the company also faced a manpower crunch. By April, Bigbasket was operating at around 50% of its capacity.

On the contrary, apps such as Milkbasket (157%), Domino’s (67%), Dmart Ready (10768%), Spencer’s Online (871%), Freshtohome (1036%), Nature’s Basket (2231%), and Paytm Mall (61.5%) saw jumps in the daily downloads ranging from minor bumps to significant increases. Once again, this highlights the diversity of the Indian online grocery market and the high potential for new players or vertical-focussed players like Freshtohome, Milkbasket, Licious and others.

What drives a great online grocery business is a strong merchant network and understanding inventory management, both of which are factors in the favour of retail giants such as Dmart, Spencer’s and others. Technology plays a key role and you have to be able to make the experience as seamless for the merchants as well as the user, but this was not the chief consideration during the lockdown months. Availability of product and quick turnaround time were high on the consumer demand list, which is something Dmart and the likes capitalised on.

“Adding tech and catering to merchants takes time and with so many options available to the user, they will derive their choices based on the service that gives them quality products at the fastest turnaround time,” said a Dunzo spokesperson.

The New Powerplay At The Grocery Table

While the lockdown has put the industry in overdrive, the big question is will these Covid-19 risers and experimenters be able to sustain the momentum?

Blume’s Agarwal believes that new players are at an advantage since the business models have been fleshed out by Bigbasket and the likes. There is no need to invent a new model, and they can simply adopt an existing successful one and build from this base. To understand which models are the most sustainable, it is imperative to highlight why exactly there was a sudden surge in the number of players and which areas this was seen in.

Outside large retailers or tech-first food aggregators such as Zomato and Swiggy, experts estimate that the chances of survival or sustainability are low for other players. They may continue to offer it as a value add to consumers, but this cannot be the core vertical focus, given the specialised needs. Aggregators have high chances of survival — despite rumours of Zomato pulling the plug on grocery delivery — and can afford to test the waters for a longer time, considering that they have a core business to fall back on as well as capital. Plus, the cost-benefit analysis in favour of growth in the segment will keep many players interested as well.

In comparison, retail players such as Dmart, Spencer’s and others would continue offering ecommerce in the neighbourhoods where they have a large client base. This is likely to take a small percentage of business away from the core digital players.

Innoven’s Sharma believes that given the change in consumer behaviour, it’s imperative for offline retailers to build some capabilities around hyper-local grocery delivery. Some people mistakenly believe that all it takes is to build delivery capability but there are many complexities involved, he emphasised.

“One needs to build a data driven supply chain, demand forecasting, real time inventory management, warehousing /sorting capabilities, location optimisation and managing wastage in case of fresh produce. Off-line retailers don’t necessarily have to build all capabilities in-house and some will explore partnerships with new age platforms and hyper-local delivery players,” Sharma added.

Finding The Unit Economics Fit

Becoming unit economics profitable is the first successful milestone for startups. This is defined by the margins a business is able to earn over and above what it spends to acquire the transaction and the user. Online grocery platform Satvacart’s CEO and founder Rahul Hari believes that this is particularly tricky for grocery startups.

“As the number of deliveries increase, so does the burn in multiples of the burn rate per delivery. But if you are able to increase the contribution margin, then with each delivery, burn will compensate and you will go closer to covering the fixed cost,” Hari added.

Among the new entrants, the fight for unit economics will be the most enticing to watch and investors are likely to place their wagers with multi-category delivery startups such as Swiggy, Zomato and Dunzo.

As we can see from above, the two major costs in the grocery industry include the fixed cost and the varying operational costs including for delivery. In a normal supply chain operation, a typical large department store such as Dmart, More, Spar or BigBazaar runs on 14%-15% margins, according to industry experts.

In the case of online grocery, the inventory-led model offers higher margins as compared to the marketplace model as the batch delivery costs offset the higher on-demand delivery costs. But at the same time, scheduled deliveries are often free of cost or tied into subscription plans, whereas in the case of on-demand delivery, the consumer is ready to bear the cost for the fast service.

Despite the increase in demand, even large stores are running at a very low margin during the lockdown as capacity is stretched and manpower is an issue. They are surviving on the basis of high volumes. That’s why the fundamental problem on the revenue side has always been low margin for online grocery. Of course, brands such as Bigbasket and Grofers have ventured into private labels to offset this low margin.

There’s another thing that should have grocery delivery startups worried. The entry of Jiomart in the online grocery segment with a massive launch in 200 cities and WhatsApp backing it will certainly make life difficult for Bigbasket, Grofers, Amazon and others. The power balance may seem to shift towards the behemoth. However, Satvacart’s Hari has a different opinion here. 

“A lot of time people think that this is a business where a lot of capital is required and anybody who has capital can win this game. However, getting the business and the metrics right is the core in this business. Scale comes automatically thereafter,” Satvacart’s Hari said.

Examples of half-baked models leading to shutdowns are dime-a-dozen in the Indian grocery delivery and hyperlocal segments. Local Baniya, which raised $5 Mn, did not invest anything into the technology side, while establishing the model and when new players like PepperTap, Grofers entered, it started rapidly expanding without having the right base model correct. PepperTap itself expanded to 27-28 odd locations and things got so complex within those cities, that they kept on building layers but both Local Banya and Peppertap failed to survive.

“So when it comes to scale, the definition does not have to be how many cities you have scaled to, but the fundamental definition of scale is how your gross sales and EBITDA is improving,” Hari reckoned.

Will Jio Have The Final Say?

The industry stakeholders Inc42 talked to said that no one player can capture the online grocery behemoth in India, as can be expected. Blume’s Agarwal said that given how small online retail is in comparison to the overall $400 Bn opportunity in India, any small increase in online footprint will be a big boon for the ecommerce sector overall.

“If online shopping grows to 5%, this is a 25% increase for the online sector, but it is only a 1% decrease for everywhere else. So the growth in online commerce does not indicate that offline commerce has declined,” he added.

Going ahead, as the category grows in size and volumes, the intensity of competition will only grow and that’s where consolidation and M&As may emerge. Larger well-funded players will have the advantage here, as per investors, so does Jio have the edge?

In response to Reliance Jio’s entry, Grofers said it would back its own tech platform to serve consumers. Cofounder Albinder Dhindsa claimed that the company welcomes more competition. “Grofers has built a strong business by focusing on the needs of our 4 Mn customers. Competition has always been there and it is healthy for the industry even if it is JioMart,” he added.

At its most recent AGM, Reliance’s Isha Ambani said that JioMart has successfully piloted kirana transformation and is built upon two fundamental pillars — omnichannel presence and tech platform. RIL chairman Mukesh Ambani added that JioMart has already reached 250K orders a day and besides groceries, it would also sell electronics, fashion, pharmaceuticals and healthcare services.

Perhaps that’s where the core grocery players can eke out a win. JioMart, with its wide focus, will need to compete with Flipkart and Amazon. And as seen during the lockdown, the adoption for Amazon and Flipkart’s grocery delivery has been underwhelming in comparison to Bigbasket, Grofers and even compared to players like Dmart, which is fairly new in the online scheme of things. 

The future of on-demand delivery will not just be about groceries or food, but also about making cities more accessible through commerce, transport and distribution of services — as these are the things that will drive more consumers to digital platforms rather than discounts. So those that already have a head start right now will need to leverage tech and their user base advantage to innovate and improve customer experience at every level while also solving the supply-side challenges.

Of course, the grocery delivery segment might just top-out like the hyperlocal boom did back in 2016, which led to major consolidation and shutdowns, including high-profile ones such as PepperTap. And if the drop in popularity of apps and downloads is any indication, India’s online grocery boom has perhaps reached its peak already.

With inputs from Nikhil Subramaniam