By: Dhanraj Bhagat
Food retailing took a huge leap in India when organised retail started with the setting up of medium to large format stores, including hypermarkets, supermarkets and convenience stores. The success factors of these stores largely depended on the location, catchment area they served and their costs — capital cost and lease rent. Over time, many closed down due to high cost. The next big push for grocery and food retailing came with the internet revolution. One of the first businesses in the e-commerce space was online retailing of grocery and food. The online grocery market in India is estimated at $150 million only, which is a fraction of the total grocery market of $360 billion. The total grocery market is expected to grow to $1 trillion by 2020. If we estimate online grocery to be even 1%, the expected growth would be tremendous.
The online grocery distribution channel in India works on three types of models. In the first one, the inventory model, the online retailer stocks the inventory and manages it based on demand. In the hyperlocal model, the retailer collects orders and then buys inventory from various other retailers, the main function being aggregation and distribution. The mixed model assumes some inventory-carrying and some sourcing from other retailers after orders have been received. However, there are some key challenges that need to be addressed:
Managing inventory costs and logistics: Inventory-carrying costs especially for cold storage could be high and can create financial bottlenecks. The key to higher earnings is therefore to manage the inventory efficiently and ensure timely delivery to the customer. It is important to have an investment plan for cold storage facilities so that the cost can be phased out. Further, adequate training of manpower in logistics and distribution would help realise better efficiencies and result in customer delight which in turn would propel repeat purchases.
Continued competition from kirana stores: Many kirana stores have also resorted to telephonic orders and online orders. They have upgraded their inventory model and reduced their delivery time to the customer. In rural areas, online purchases still do not exist. Hence it would be necessary for the online retailer to improve the customer experience through latest technology and provide other incentives to ensure that the customer experience results in more loyalty. Online retailing of food and grocery will continue to grow over the next five years with the entry of more players. While kirana stores would continue to dominate, their share in the total grocery and food retail business in the country would come down in favour of online retailing.
The author is partner, Grant Thornton India LLP