Online grocery stores are riding primarily on discounts. Will the customers continue to come once the freebies dry up?
E-commerce spells convenience but never has it been more pivotal as in the case of the burgeoning online grocery segment. According to Technopak’s e-tailing report, the e-commerce business is 0.4% of the overall retail market. It stood at $2.3 billion in 2014 and is expected to reach $32 billion by 2020. Of the overall e-tail market, food and grocery accounts for one per cent, which is expected to double by 2020. Unlike a regular e-commerce business run by the likes of Flipkart and Amazon, the rules of the game are different when it comes to running an online food and grocery business. “This is a city specific business with a very high stock keeping unit (SKU) complexity as one cannot keep the stock in a warehouse forever, especially in case of perishable goods,” says Pragya Singh, vice president—retail, Technopak Advisors. It is important to note that the online food and grocery business is driven by local needs and fulfilling it remains a challenge.
To be sure, with investors examining multi-brand e-tail businesses closely, hyperlocals and online grocery firms in particular, are the current favourites. The category has received a total investment of $103.21 million since January 2015.
For investment companies, the fact that grocery is a high frequency purchase makes it interesting. “This is unlike in the case of multi-category e-commerce platforms where customers come in when there is a discount,” says an angel investor, who did not want to be named.
Agrees Sharad Harjai, assistant vice president – marketing, Grofers, that despite the presence of 30 players in the online grocery business, it is a promising category. “The sector is yet to be explored properly. Even within the online grocery space, there are many layers,” says Harjai. For example, there can be a company selling only vegetables or meat products online. Hence there is a huge opportunity for growth for every company that enters this space.
What do you stand for?
Even as there are ample opportunities to grow the business, a solid business model is actually what drives it. Currently there are two-three types of business models that are followed. For instance, Bengaluru based BigBasket follows an inventory-led model, supported by offline stores, and stocks all items in its warehouses located in Bengaluru, Hyderabad, Mumbai, Chennai and Delhi and National Capital Region (NCR). The company plans to add two more warehouses in Kolkata and Ahmedabad. According to Hari Menon, CEO, BigBasket, an inventory-led model allows one to earn margins as much as 22% just like an offline retailer. “As we use four-wheelers instead of two-wheelers, we have the ability to deliver orders worth R3000-4000. Also, we stock 15,000 SKUs in our warehouses, thus providing a huge range of products to consumers,” adds Menon.
BigBasket’s competitors PepperTap, ZopNow and Grofers follow a marketplace model.
Under this, the e-tailer ties up with various local mom-and-pop stores. “The marketplace model enables partner stores to generate 40% increase in sales,” says Navneet Singh, co-founder and CEO, PepperTap.
Besides these two models, there exists a hybrid business model followed by the likes of LocalBanya and Zip.in. “The model is a mix of warehousing and just-in-time. The latter is done to scale up through tie-ups with major FMCG companies, cash-and-carry outlets and other distributors,” says Karan Mehrotra, CEO, LocalBanya.
Too much of a good thing
Just like any other e-commerce business, deals and discounts drive this sector as well. From cashbacks to 10-50% discounts on marked prices, online grocery companies entice customers with various offers from time to time.
According to Mukesh Singh, founder, ZopNow, discounting helps in lowering the entry barrier for consumers. “In some ways, this is a subtle change of habit for consumers, and during the formative phases of the new habit it is important to make it super easy for consumers,” adds Singh.
Given that grocery is a 1-2% margin-led business, discounts can hurt the bottom line severely. Perhaps realising this, players are coming out with innovative schemes to ensure that the customer keeps on coming back. LocalBanya recently launched a ‘smart grocery subscription’ plan for its consumers. Customers can choose from three plans— Vanilla, Cinnamon and Saffron—valid for three months, six months and a year respectively, with corresponding discounts of 20%, 25% and 30%. Again, BigBasket sells products under the brand names Royal, Popular and Fresho.
It also sells 35 kinds of meal kits, under BigBasket’s ‘happy meal’ scheme. “We plan to start one-hour express delivery for orders worth R400-500,” says Menon.
Meanwhile, Mumbai based Grofers claims that receiving something extra with an order ensures repeat customers.
“We gave comic books on mangoes when we delivered mangoes during the summer season. Likewise, before Independence Day, we gave a flag kit to every customer who placed an order,” says Harjai.
Expanding reach is next on the agenda. While new entrant Zip.in plans to expand its services from Hyderabad to Vishakapatnam by the end of this month, PepperTap is looking at entering tier 1 and tier 2 cities.
Advertising is crucial, too. BigBasket spent R50 crore on print and radio advertising in the first seven months of the year. Next in line is Grofers that spent R29 crore followed by LocalBanya and PepperTap at R54.4 crore and R9 crore, respectively.
Singh of Techopak, believes that the action seen in the online grocery market is just the tip of the iceberg. “Exciting things can be expected going forward. There is still a long way to go for a shakeout though,” she says.