Losses to continue for few years but e-grocers playing for big profits

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July 05, 2021 4:15 AM

Goldman Sachs expects grocery to be the biggest driver of incremental gowth, with a 44% contribution to incremental e-commerce gross merchandise value (GMV) between FY20 and FY25.

“CAC will remain high till the competition is aggressive. And it will be so for the next couple of years, at least. The market is so nascent, you would want to gain share,” says Mathur.

While e-grocers have found themselves many new customers during the pandemic, it’s unlikely they would have turned profitable. Losses widened for the major players in FY20 and experts believe they could remain in the red for a few more years until their customer bases have grown further — the total number of online grocery shoppers is estimated at 130 million — and repeat purchases grow.

On a per transaction basis e-grocers are making money, at least in the cities where they have been able to fairly scale up due to higher average order values, smaller discounts and better margins. For instance, in a city like Bengaluru which has high adoption, most players may have already reached break even, say analysts. “Companies will continue clocking losses for the next couple of years but the quantum should come down as profitability from mature cities will offset the losses to an extent,” explains Ankur Pahwa, partner at EY.

Arpit Mathur, partner at Kearney, observes that e-grocers need new customers and acquiring consumers is expensive. The customer acquisition cost or CAC is what hurts profitability. “CAC will remain high till the competition is aggressive. And it will be so for the next couple of years, at least. The market is so nascent, you would want to gain share,” says Mathur.

Goldman Sachs expects grocery to be the biggest driver of incremental gowth, with a 44% contribution to incremental e-commerce gross merchandise value (GMV) between FY20 and FY25.

Competition in the segment, that accounts for less than 1% of the $380-billion grocery market, is set to intensify as players eye expansion beyond the metros and tier one cities. Consequently, firms will continue to book losses and immediate profitability is also not a priority for most of them. As EY’s Pahwa points out, “much of the burn is coming from expansion as unit economics have improved over time”.

Companies typically bank on advertising and promotional schemes to lure new customers. The key will be to build a loyal base of customers in order to drive repeat purchases. “Firms need to spend money every time they acquire a new customer but repeat purchases do not entail additional spending,” says Mathur who believes that in grocery, the share of repeat purchases of total transactions is still quite low. Companies are experimenting with various strategies; earlier this year, Amazon for instance, integrated its Pantry offering within Fresh to create a single online grocery store. The idea is to offer consumers the convenience of Fresh’s swift delivery and Pantry’s better product deals at one go.

Flipkart launched hyperlocal service Flipkart Quick in select locations to enable grocery delivery, among other product categories, in 90 minutes.

India’s e-grocery market is now being driven by five players — Tata Group-owned BigBasket, Grofers, Amazon, Flipkart and JioMart. Companies, meanwhile, are trying to better manage their costs by bringing more private label brands into the mix that typically fetch better returns and adopting strategies like reducing the cost of stocking products. They are also looking at new revenue streams — for instance, some companies are using their repository of customer data to provide business intelligence to retail brands.

Grofers’ total losses shot up to 42% to Rs 637.49 crore in FY20 as revenues from operations grew 135.62% year-on-year to Rs 165.27 crore. Expenses went up 53.17% y-o-y to Rs 814.29 crore as advertising and promotional costs more than doubled to Rs 179.21 crore and discounting charges rose to Rs 158.59 crore. BigBasket, now owned by the Tata Group, posted a 26.18% rise in losses to Rs 709.98 crore as total expenses increased by 31.08% y-o-y to Rs 4,411.39 crore. Advertising and promotional costs declined by about 22% but remained elevated at Rs 148.07 crore.

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