India’s online grocery market is a hotly contested segment, let’s examine what it is all about, and what moves are afoot.
Harish Puppala | Rakesh Sharma
Online grocery is witnessing something of a boom in India. According to US grocery shopper trends in 2018, 43 percent of all millennials occasionally or fairly often shopped for groceries online.
The trickledown effect of this trend can also be seen in India. And the investments have also been pouring in. Earlier this month, BigBasket announced that it received $150 million (or Rs 1,040 crore) in funding from South Korea’s Mirae Asset-Naver Asia Growth Fund, UK’s CDC Group, and existing investor Alibaba, at a valuation of over $1 billion.
In this month, BigBasket’s Indian rival Grofers raised a $200 million Series F funding round led by SoftBank Vision Fund. The latest funding round has reportedly pushed Grofers close to the unicorn club, according to Bloomberg.
Prior to that, in March, SoftBank had increased its stake in Grofers to 42 percent with a $60 million investment while Sequoia and Tiger Global also invested $1.8 million and $19 million respectively.
In April, it was reported that Amazon had invested Rs 238 crore in Amazon Retail India, according to filings with the Registrar of Companies. The money came from Amazon's company in Singapore, Amazon Corporate Holdings. A few days ago, Flipkart announced the launch of its online grocery store, Flipkart Supermart, in Mumbai. It was the company’s fifth city Supermart after launching similar ventures in Bengaluru, Chennai, Hyderabad and New Delhi.
Reports indicate that even Reliance could be getting in on the action. Mint reported that Reliance Retail launched a food and grocery app among its employees in April to prepare for the commercial launch later in the year. If Reliance intends on doing a Jio-style disruption, we could even have a discount war in the near future. A few days ago, Spencer’s had announced it is acquiring upscale grocery chain Nature’s Basket for around Rs 300 crore. By all accounts, there is more churn in the segment than ever before.
Now that we know India’s online grocery market is a hotly contested segment, let’s examine what it is all about, and what moves are afoot.
India’s online grocery market: nascent, crowded
RedSeer Consulting, a research and advisory firm focused on the consumer internet market, claimed recently that the total value of India’s grocery market is around $500 billion. Merely 0.2 percent of that value is online - a $1.2 billion market, and about $1 billion of that is only hyper-local grocery.The report went so far as to claim, “Given this massive potential, we expect the online market to continue chugging along at 50 percent growth rate for the next few years, which will be served by various models, including category specialists and narrow and wide supermarkets.”
Anil Joshi, founder and managing partner at Unicorn India Ventures, a venture capital investment firm, told Fortune India, “In general, grocery is a cash business, especially for online players. Hence, they will always be in a negative working capital stage. But as they will need money for customer acquisition, having capital is crucial, particularly if they have to expand.”
An analysis by Forbes claimed this market is supposed to grow up to $3 billion to $5 billion in the next 3-4 years, at a CAGR of 60-70 percent. Business Today observed that “...investors continue to be bullish on the online grocery space as the next vertical story of Indian e-tailing, after electronics and fashion. This vertical is growing at a scorching pace...investors believe that a big ticket consolidation, on the lines of Walmart-Flipkart, is on the horizon.” It claims that India's online grocery market, which has already seen a boom and bust cycle over the last five years, is seeing round two of optimism with investors realising the untapped potential.
The segment is estimated to account for less than 1 percent of overall e-commerce in the country. That said, it is the fastest-growing one with an estimated compounded annual growth rate of 62 percent between 2016 and 2022.
A report by the International Organisation of Scientific Research, by the year 2020, online retail is expected to make up 2 percent of the overall grocery sales in India, creating a potential market size of around $10 billion, or Rs 60,000 crore.
But why are so many players rushing to make gains in this segment? All things considered, India has only 400 million smartphone users, and less than 100 million active online shoppers.
Sreedhar Prasad, a partner at KPMG explained, “Grocery is a low-margin business, but the frequency of transactions is high because it is an essential purchase for any household...Groceries is the next logical step for e-commerce companies with a large customer base.” And businesses have given this some thought, after working through more than one business model.
Albinder Dhindsa, CEO of Grofers, claimed that the Indian customer is not as affluent as s/he is believed to be. He said, “We have minimal disposable income. Our GDP per capita is still low; a big chunk of income is spent on grocery.”
There are two larger players, BigBasket and Grofers, competing for the biggest slice of this grocery-packed pie. Amazon and Walmart-backed Flipkart are attempting once more to break into this space. L:et’s look at the big four individually.
The two protagonists
First off, the market leader - BigBasket. This company is the big success story in online grocery. Remember those ads some years ago with Shahrukh Khan? Yes, we never quite believed that India’s biggest movie star at the time actually ordered his own palak, Bournvita and Marie biscuits the way we do…but it gives you an idea of the prominence BigBasket enjoys.
Bengaluru-based BigBasket was started in 2011. Prior to BigBasket, its co-founders - Hari Menon, VS Sudhakar, Vipul Parekh, Abhinay Choudhari, and VS Ramesh - had together launched Fabmart.com, one of India’s first online retail and grocery businesses in 1999. They went on to start a chain of physical grocery stores, Fabmall, across the four southern states, which was sold to the Aditya Birla Group in 2006.
Currently, BigBasket, which is India’s largest online grocery provider, delivers more than 20,000 products from nearly 1,000 brands.
Big Basket raised $300 million in February 2018 as part of its series E financing which was led by the Alibaba Group. It included an element of secondary shares, which gave the company a post-money valuation of $850 million. Following that, Big Basket made three acquisitions as it forayed into different services as such as milk delivery and instant deliveries through vending machines, in a bid to increase frequencies in transactions.
According to RedSeer, despite operating in a highly competitive market, BigBasket’s first-mover advantage, access to large funds, and a strong pan India presence have helped it compete against e-commerce giants such as Amazon India, which launched its grocery business in 2017. Anil Joshi, founder and managing partner at Unicorn India Ventures, explained, “Whoever is able to optimise operations will be real winner in this segment. Currently, BigBasket has (an) edge over (the) others. One should not discount Walmart, Amazon and JIO, they will be playing big roles here (online grocery) and e-commerce.”
The capital infusions we saw recently are expected to give more firepower to BigBasket in the battle of supremacy in the online grocery segment. The entry of deep-pocketed horizontal players Amazon (which has Amazon Pantry and Prime Now) and Flipkart, which will definitely leverage Walmart’s expertise in this segment could well see the fight intensify. VS Sudhakar, co-founder of BigBasket, told Mint, “We have a unique opportunity to build one of the largest grocery businesses in the country and we expect the capital raised in this round to continue to enable us to do just that.” The company plans to use the new funds to deepen its presence in existing markets with development in its first mile, scaling up supply chain capabilities and developing new reseller channels. What sets BigBasket apart is their success in cracking difficult segments, like delivery of perishables. Joshi said looking beyond tier 1 and tier 2 markets, BigBasket has to see whether it’s now out there to chase growth or profitability.
For anyone not conversant with this segment, it comes as a surprise that Big Basket had, in early 2017, held talks with Gurgaon-based Grofers for a potential buyout. Grofers was struggling to raise funds but managed to turn around its business by early 2018 through cost cuts, reducing operations in some markets and removing unprofitable products.
Grofers’ story is every bit as interesting as BigBasket. Founded in 2013 by IIT graduates Albinder Dhindsa and Saurabh Kumar, Grofers began in 2014 with a promise to deliver app-ordered groceries from local kirana stores in two hours. The idea piqued the interest of the technology investors like Sequoia Capital, Tiger Global Management, and SoftBank, who invested $165 million over a period of just 10 months in 2015.
But Dhindsa and Kumar soon discovered that the business model was not sustainable. Grofers switched to an inventory model, even as rivals like Snapdeal-backed Peppertap decided to shut shop. This transition slowed down growth, and Grofers became a pariah among investors who had burned their fingers in other hyperlocal businesses.
It saw valuation slide from $400 million to $300 million in early 2018. But one year ago, it secured fresh funding of $200 million from SoftBank and South Korea’s KTB, and its valuation rose to a whopping $700 million. Business picked up as Grofers competed with Alibaba-backed Bigbasket, Walmart-owned Flipkart, and Amazon India. Dhindsa explained how the company turned things around. He told the Economic Times, “Two things happened. One, our Bangalore warehouse opened in February 2017, which was our biggest facility then and is still the third largest warehouse. That was a big bet for us, and we started seeing the impact of a large facility. Two, we started focusing our SKUs [stock keeping units] on middle class customers and getting rid of niche products and categories. Areas such as East Delhi, Yelahanka in Bangalore and Chandivali in Mumbai had the best retention as there were hardly any modern trade outlets there.
As we moved to an inventory model, we could keep only a limited stock in the warehouses. We couldn’t keep 8,000 SKUs, and it became a space and cost effort. But we saved a lot of money doing fewer SKUs, and we could offer them at cheaper rates to customers. From January 2017 to January 2019, our gross sales increased by 11 times.”
Dhindsa dismisses talk of consolidation or mergers with BigBasket. He said, “Some of it doesn’t really makes sense. One side has to give in for these things to happen. Our and our investors’ intent is clear. Till the business is going well, you are not going to see any move towards consolidation. Those opportunities really come up when some business is struggling.”
He makes a valid point. Market intelligence provider Kalagato recently said BigBasket leads the online grocery market with a 35.2 percent share, and is followed by Grofers at 31.5 percent while Amazon Now has a 31.2 percent share of the market. The rest is accounted for by various companies like Satvacart, Godrej Nature’s Basket and DailyNinja, among others.
The two (big) challengers
The threats to Grofers and BigBasket emanate primarily from e-commerce giants Amazon and Flipkart, who have been expanding their grocery verticals aggressively.
As mentioned earlier, Amazon has put Rs 238 crore into Amazon Retail India Private Limited, according to filings available with the RoC. The money has come from Amazon's company in Singapore, Amazon Corporate Holdings. The investment shows that Amazon is keen to enter the food space in India with ARIPL, which sells groceries and home supplies. A recent DIPP circular, stating that ecommerce companies founded by foreign firms could not hold stake in distribution companies and source more than 25 percent of products from one distributor, sent the entire ecommerce industry into a tizzy. The circular required ecommerce companies to restructure operations. Everyone wondered how this would impact Amazon Pantry, which was sourcing products from Future Group and More to deliver to customers in under two hours.
But the behemoth wasn’t about to throw in the towel just yet.
With this new infusion of money, Amazon Retail is poised to take on Grofers and BigBasket. Yes, it is a bit comical to hear that a company like Amazon allocated 238 crores when BigBasket and Grofers are receiving hundreds of millions of dollars to outdo their competition.
But it also means Amazon hasn’t given up on the business, and seems willing to ride on its current network to build its food and grocery arm. It has been operating the grocery business since 2015 but began marketing it aggressively after it re-branded the vertical as Prime Now in May of 2018. Since then, Amazon has committed $500 million to the venture. It has also received approvals for running brick-and-mortar stores in India.
Its bete noire in India, Flipkart, is once again looking at the online grocery business. Aside from launching Flipkart Supermarts in five cities, Flipkart’s groceries portfolio includes staples, FMCG and dairy products, and even a private label named Supermart Select, which offers staples.
Manish Kumar, Head of Grocery at Flipkart, said, “With Flipkart Supermart, we see tremendous potential for us to leverage our expertise in logistics and technology to give our customers the maximum savings, convenience, quality, and breadth of selection. Our grocery business has grown phenomenally over the last year, making this the right time for us to bring our seamless shopping experience to Mumbaikers. We are constantly working to improve our offerings and are looking forward to excelling in this space.”
Flipkart is also in talks to buy Bengaluru-based grocery chain Namdhari’s Fresh, a clear indication of the direction they want to take next. One source told the Economic Times, “This business may be of interest to Walmart’s agri supply chain.” Walmart or not, Flipkart has been eyeing the grocery segment for a while now. Back in April 2017, CEO Kalyan Krishnamurthy, had said, “Eighty percent of the units bought in India are in the groceries segment. The grocery market is almost as big as $400 Mn-$600 Mn, so we will have to get into it.” And the company might just be stepping into the game at the right time. Morgan Stanley expects the online food and grocery segment in India to become the fastest-growing segments in India, expanding at a CAGR of 141 percent by 2020 and contributing $15 billion or 12.5 percent of overall online retail sales.
A tough battle looms
While the big players and the challengers strap in for the long haul and prepare for bigger battles ahead, the fact remains that online grocery in India is a very challenging business. Ankur Bisen, senior vice-president at management consulting firm Technopak Advisors, explains, “The business is challenging, with low margins, which means less room for discounts. It needs a dedicated focus on core offering and quality while creating assets around it, which is difficult in a marketplace model...Quality and timely delivery are crucial to grocery business more than any other business.” He sees the competitors adopting a more well-rounded strategy. He said, “These players are aware of these challenges and are, therefore, investing in technology and acquisitions to fill the gap. They are addressing these issues and given their deep pockets and technology assets, it will be difficult for pure-play e-grocers to compete against them.”
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