The going is getting tough for the online grocers in India. From 60+ startups in this space that started in the last few years, we are now left with only a handful. Bigbasket, Grofers, Zopnow, AaramShop are some of the leading ones and have cumulatively raised upwards of $300 Mn. Most of the other e-grocers have either shut shop or pivoted their business model. So, what are the reasons grocery e-tailers have not been able to replace my call to the local kirana? Will the online grocery startups get their unit economics in place to build sustainable ventures?
The initial euphoria…
India’s grocery market is ~ $ 503 Bn, making India the 3rd largest grocery market in the world, and is expected to touch $ 900 Bn by 2020. The Indian online groceries market is estimated to reach Rs 2.7 bn by FY19 growing at a CAGR of 62% from 2016 to 2022.
The hype around online grocery was partially created due to the increasing internet penetration and growth in ecommerce verticals like clothing etc. This built a perception for the investor and entrepreneur community alike, that the online grocer could be a substitute for the local kirana. This initial belief led investors to bankroll large amounts of money into e-grocers, despite unsustainable unit economics. With too much money already invested in e-grocers, unproven business models and a consumer acquisition strategy reminiscent of the approach of failed startups in other spaces, online grocery startups may be staring at similar turbulent times ahead.
What went wrong?
A number of issues have resulted in a shakeup in the e-grocery landscape with startups such as Lazylad pivoting from a B2C player to a B2B focus, PepperTap is now focusing only on its logistics business while Grofers has scaled back its operations in multiple cities.
Customer acquisition costs
A prominent VC noted, at ~500 deliveries per day and a basket size of INR 1,000, an e-grocer was likely to lose ~INR 112 per delivery! Huge operational costs including warehousing / cold storage, delivery and return costs make it unviable for e-grocers at a smaller scale. It was only at ~2000 deliveries and a basket size of INR 1,500, would the company be able to make money. For the e-grocery model to work even at that scale is questionable given the increasing complexities that come with scale.
Lack of customer loyalty
E-grocery startups are dolling out discounts / free delivery & returns in the garb of customer acquisition. This lures users to use e-grocery sites only for freebies and not for their perceived better service or product selection / quality. Consumers shift from one site to another and once the discounts stop, they are back to ordering from their local kirana. These discounts and freebies dent the already wafer thin margins and the online grocers bleed on every delivery.
To capture market share e-grocers started expanding rapidly paying no heed to unit economics, market acceptability and city level profitability. Tier II cities may not have enough volumes for a sustainable business with a small tech-savvy population and constantly changing consumption patterns across locations, resulting in huge losses for the e-grocers. Additionally, grocery shopping is often a medium of entertainment and not a chore in smaller towns. As a result, Peppertap and Grofers have had to shutter operations in multiple locations after having spent a lot of money and effort.
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Recruiting and training of delivery boys, cash handling coupled with logistical issues with perishable products, wastage and product returns add to the woes of online grocers. These issues add to the cost of order fulfilment and further increase the cash burn.
Says Vikram Upadhyaya, Chief Mentor and Evangelist at GHV Accelerator, “The business model for any startup in the online grocery space must ideally be asset-light. Operational costs can be very detrimental to scale. Essentially, they must crack ‘unit economics’ first. This sector demands running a marathon, not a sprint….”
What does the future hold?
The e-grocer’s share and reach are limited at present – only 1% of groceries are purchased online in India! To gain a strong foothold in the market, e-grocers will have to fix their unit economics and address the harsh reality of burning cash in every delivery. The ability to offer a wide product range, the right product mix, manage logistics and prevent wastage of perishable items are essential to getting the game right.
Consolidation is likely to continue in this market as seen by the Nature’s Basket – Ekstop, AskMe – BestatLowest, and Grofers – MyGreenBox transactions. There are likely to be a couple of market leaders dominating the market as seen in other e-commerce verticals like online eyewear retail has a clear leader in Lenskart.com.
Growth of private labels
E-grocers are also likely to push more profitable private label offerings than being mere storefronts for existing brands. Private label products are competitively priced as compared to name brands and offer a greater value proposition to consumers where they see little differentiation among products. Private label sales contribute ~35% of total sales of Bigbasket and are growing rapidly. Grofers has also started to offer private labels in pulses, fruits and vegetables and is likely to earn gross margins in the range of 25-35%.
Local and organic produce
With the recent announcement of 100% FDI being allowed in food retail8, online grocers are likely to push for sales of fresh produce. Sales of fresh produce and organic products are high gross margin opportunities and also a large contributor to net profit even for brick and mortar stores, which the e-grocers are also looking to capture.
A combination of the inventory and hyper-local models is likely to emerge. Bigbasket started as an inventory based player and now also offers hyper-local delivery services with tie-ups with local retailers. The advent of the omni-channel and the click and collect model where brick and mortar will integrate with the online grocers, will provide consumers seamless shopping experiences.
Currently, the dynamics of the ecosystem are quite fluid and it might be too premature to write an obituary for these startups. Going by the increasing consumer adoption in other ecommerce verticals and successful global models, like LeShop (Switzerland), Ocado (UK), TMall (China) among others, establish that all is not lost for Indian e-grocery startups. However, to bring around a turnover in fortunes, these startups will have to act fast.
[This is a guest blog by Shweta Jain, Executive Team Member at Aurum Equity Partners LLP]