Express grocery delivery: How far will it go this time?

Publicly listed Zomato has launched grocery delivery on its app and is offering a delivery time of 30-45 minutes.

However, this is not for the first time that online grocers are experimenting with express delivery. While food ordering firms Swiggy and Zomato are new to the game, Grofers and BigBasket have burnt their fingers in this segment before.

The two companies had launched express deliveries a few years ago but shut down the service because it was not viable.

So, what’s changed now that’s making these companies fall head over heels to deliver that bag of dhaniya or wafers and soda to you at breakneck speed?

Here’s what!

The Covid-19 pandemic has turbo-charged the adoption of online grocery by consumers who want superfast delivery – the faster the better. Besides, over the past couple of years, the companies have matured and have set up better supply chains and smarter hub locations. They are heavily focusing on deep tech to understand consumer preferences better.

Conventionally, express delivery had a twofold problem – unpredictable availability of the required products and provisions at third-party stores and cart values that were too low to justify delivery.

Dark stores

Learning from the past, they have now addressed these issues. The companies have ditched the marketplace model and adopted dark or cloud stores. They have also invested heavily in these hubs and brought them as close as possible to the consumers.

Most of these companies source inventory from dealers, stocking them in these dark stores and utilising their fleet to get them delivered to customers, according to people aware of the matter. The focus is on two aspects – core inventory in one hub and proximity to customers.

Convenience grocery is going to be a big thing in the coming 5-10 years, Swiggy founder Sriharsha Majety told Moneycontrol last month soon after raising $1.25 billion.

“There are many groceries in India and this (express) is the grocery we are going after,” he said, adding that even though the burn rate in food delivery has rationalised, the company would continue to invest in breakout areas like this.

Swiggy and others are investing heavily in setting up hubs or dark stores. These centres are much smaller than conventional warehouses of online grocers and are used to store inventory closer to consumers.

“Over the last few years, companies have created small hubs across many locations. It won’t be surprising to find multiple hubs in a 20 km radius,” said Amit Nawka, Partner Deals and India Startup leader at PwC.
After monitoring consumer patterns for years and putting artificial intelligence to good use, these grocery delivery companies are also able to predict demand and stock up on inventory accordingly.

“They have started to understand the user behaviour of every locality and stocking up these small hubs with very specific items. Even the supply chain has matured and that is why they are able to make sense of the economics,” he added.

The inventory in these hubs change every few kilometres, depending on the demand and customer preferences in a locality.

Calculating the costs

According to analysts, setting up a 2,000-5,000 square foot hub could cost Rs 20 lakh to Rs 25 lakh. Besides, companies have to bear the rent and pay the staffers who sort out products at the hub and the riders who deliver them.

Given that the service is still at a nascent stage in most cities, the average size of an express grocery delivery hasn’t been clearly determined. Company and industry executives say it should range from Rs 200 to Rs 300 per delivery, which is a fraction of monthly grocery orders of Rs 1,200-1,500.

“Obviously the ticket size in the express delivery will be lower. This game is more about the number of transactions you can push through,” said Arpit Mathur, a partner at Kearney.

In its earlier avatar, express deliveries would involve third-party grocery stores. It was a difficult model to manage because the inventory would never be known in real time and every missing item would result in a bad experience for the consumer.

“The idea is that if you can deliver good customer value and the customers stick with you, then you can drive repeat purchasing. The average ticket size will not grow but the frequency of purchase should grow. So customers would order every 2-3 days. Then the company doesn't have to continuously spend on acquiring consumers. Ultimately, this will lead to profitability,” said Mathur.

According to industry estimates, online commerce companies spend about Rs 150 to acquire a customer.

The average cost of a delivery is Rs 50-60 in a radius of 5 km.

The grocers get a retail margin of 25-30 percent on fast moving consumer goods. For every Rs 300 order, the company gets Rs 75-90. Excluding the infrastructure cost, as long as the cost of delivering is below Rs 80, they will make money.

Delivery fee

Most companies plan to charge consumers a basic delivery fee. In New Delhi, Swiggy charges Rs 5 for orders less than Rs 99, while in Bengaluru, customers have to pay a Rs 20-30 delivery fee for orders less than Rs 300.

“The companies may be burning money in the beginning to capture the market and consumer habits. Over a period of time, the order value will be increasing while the cost of delivery will be dropping because more and more people will be buying and that will bring efficiency,” said Nawka of PwC.

Another silver lining for grocery is that unlike food deliveries, which are driven by discounts to a large extent, here the larger need is to get orders across faster. The company that manages to get the right product assortment will get a larger share of the market rather than an entity that offers deep discounts.

“This is the other factor which will take companies towards the path to profitability,” Mathur said.
Still, will riders manage to stick to the 15-30 minute timeline offered by most companies? Quite likely!

The delivery duration is calculated from the time an order is placed on the grocer’s app to the time it reaches the doorstep of the consumer.

According to Zomato, it collected food from restaurant partners and delivered it to customers with a median delivery time of less than 30 minutes in FY20. However, unlike food, which requires a minimum of 10-15 minutes of preparation, grocery just needs to be packed, reducing delivery time significantly.

“Once the order is placed, the picker has to pack and keep the items ready. Five minutes are enough for a delivery boy to pick it up,” said a senior executive at one of the companies mentioned, requesting anonymity.

While Swiggy’s Instamart is completely following the express delivery model, BigBasket is looking at express and scheduled next-day delivery options. Grofers is said to be shifting gears to focus completely on express delivery.

Deep pockets

According to a recent survey by Reedseer, quick commerce is expected to grow 10-15-fold in the next five years to become a $5 billion opportunity by 2025.

It is a huge sector to get into when customer preference to buy online has seen an unprecedented rise.

“The companies will have to set up thousands of dark stores and look at breaking even each of them to get to a unit economic profitability. All of this requires huge amounts of funding. Thus, it will be very difficult for a new entrant to venture into the market now,” said K Ganesh, a serial entrepreneur and promoter in companies including BigBasket, Portea Medical and HomeLane, implying the market was open only for players with deep pockets.

While Swiggy concluded a funding round last month, Zomato raised $1.26 through a very successful initial public offering and has invested $120 million in SoftBank-backed Grofers. BigBasket sold a majority stake to Tata Sons reportedly for $1.31 billion.

Global trend

Globally, too, huge investments are pouring into the quick commerce sector, benefitting companies such as Gorillas, GoPuff and Getir. Many are again in talks with new investors for larger funding rounds.

As per a recent report, Berlin-based on-demand delivery app Gorillas is expected to raise $1 billion at a valuation of $6 billion. The company became a unicorn about six months ago with a $290 million funding round.

SoftBank-backed GoPuff secured $1 billion in new funding at a $15 billion valuation just last month. It offers delivery of immediate everyday needs such as cleaning and home products, over-the-counter medications, baby and pet products, food and drinks, and in some markets, fresh prepared food and alcohol.
In Turkey, rapid delivery firm Getir tripled its valuation in June to over $7.5 billion since March in a $555 million funding round.

All these companies work through the model of neighbourhood warehouses or micro-fulfilment centres.

It will be interesting to see how soon their domestic peers capture this segment that shows no sign of slowing down.