Online grocery business model is yet to be cracked!

Online grocery is a successful business model in many developed countries like Japan, France, Switzerland, UK, US etc. Now, the market is set to become an exciting space and experience exponential growth in India with a large chunk of Indian population coming online.

Retail consultancy Technopak expects the online grocery business to grow at a rate of 25-30 per cent year-on-year in major Indian cities. Research firm IGD predicts that by 2016, the Indian grocery market would overtake Japan to become the third largest market worldwide. India’s online grocery market, which is estimated to be less than $100 million at present, is expected to cross $25 billion by 2020.

Gradually, the online grocery shopping started creating ripples luring other e-commerce players to grab a pie. In India, online grocery is set to thrive and gain significant market share of the Indian e-commerce industry. Biggies such Flipkart, Ola, Paytm, Tata Group’s My247market.com are trying their hands in this emerging segment.  

Nascent, but growing market

The market is still at nascent stage right now. However, the growth in this sector looks promising, considering the actions taken place from the last 2-3 years. The market has seen the entry of many emerging players over the years like Bigbasket, ZopNow, Localbanya, Aaramshop etc, and in the recent past some new players have made its penetration like Pinkcitykirana, Grofers, PepperTap, etc.

“The Indian food and grocery market ranks 6th in the world. As compared to other developed countries that are already sitting at online grocery market in billions of dollars, Indian online grocery market has managed to reach a size of $150-200 million in the past 4-5 years,” says Sandeep Agarwal, Co-founder, Pinkcitykirana. The firm is one of the small players in this industry currently operating in Jaipur with a customer base of over 1000, 6000 SKUs and have delivered more than 5000 orders.

Indian market is at the stage, where a number of young companies are trying a number of different models around Grocery delivery, including both inventory led models and those that leverage existing store inventory. “There are several start-ups that have been funded in this space, but most of the investment has been in ventures which are focused either on an asset heavy model or on logistics led model,” explains Abhinav Mathur, Director, Aaramshop. The three year old online grocery firm has signed up more than 7,000 retailers across 50 cities.

Changing the mindset

The awareness of online grocery is yet to gain the mindshare of consumers, with only 1 to 1.5 per cent of the total groceries which Indians purchase online. This is expected to increase to 2 to 3 per cent in the visible future.

“Growth Rate of Online Retail Market is 35 per cent recently and India has just started seeing an increase in the online grocery shopping. In the current scenario, less than 1 per cent of the groceries which Indians purchase are online. The market is expected to grow to 3.5 per cent of the total market by 2020,” says VikramUpadhyaya, Founder and Chief Evangelist at GHV Accelerator.

Usually, the Indian consumers have a habit of buying grocery products from trusted local stores and big brands.“The approach towards online grocery needs to be more localized and hence, their sellers and processes need to be aligned to local fulfilment. This is a different ball game in comparison to other categories,” shares Manav Sethi, Group CMO, Askme.com, which recently acquired an online grocery marketplace BestAtLowest.

However, the psychological process involved in the buying behaviour of the consumers has started taking a u-turn, as convenience has become a magic calling card for the e-commerce industry and the same with e-grocery also.

Challenges

Maintaining inventory model for the perishable goods is an easy task which therefore, leads players face loss in monetary terms. The handling, packaging and delivery cost per order is high in this sector.

High Quality, low prices and timely delivery are some of the crucial factors that define the success of the online grocery business. “A number of young companies are trying a number of different models around Grocery delivery. The online business model needs to be driven by differentiation from off-line purchasing, instilling buyer confidence and making the entire supply chain more efficient,” says Saurabh Kumar, co-founder, Grofers. Gurgaon-based express delivery marketplace Grofers has so far partnered with over 250 merchants across Delhi and Mumbai. The one year old company now processes over 30,000 deliveries every month.

Speaking on the challenges faced in terms of business growth, Rashi Choudhary, Co-founder and COO, LocalBanya.com emphasised that while growth comes from entering new markets, the real kicker is getting people to turn into repeat customers.

Right now, players are trying different business models to differentiate themselves in this space. Given the potential market, it will be wise to take a closer look at different attempts to build companies that strive to tackle this opportunity in different ways. The significant traction of consumers and a thriving supply side eco-system can lead one to experience the taste of success.

“Online grocery service is a very capital intensive business and this model is yet to be cracked as it has its own implications,” tells Navneet Singh, Co-founder, PepperTap. The Gurgaon based mobile-first hyper local grocery delivery service was founded in November 2014 by Navneet Singh and Milind Sharma. PepperTap offers a wide-range of groceries and daily-need products. Currently, PepperTap offers more than 15,000 SKUs across categories including Staples, food & dairy products, household items, fresh fruits & vegetables etc.

“Online grocery start-ups are not like a high-end technology start-ups that everyone looks for. If you don’t know the business inside out, no matter how good your technology is and how much funding you have raised, it will fail,” asserts Agarwal.

Supportive system

Over the past few months a handful of online grocery start-ups are increasingly luring the attention of investors towards this segment. Recently, Grofers secured around $10 million in Series A funding from Sequoia Capital and Tiger Global. Mumbai-based online grocery retail store LocalBanya.com has closed a fresh round of funding from Shrem Strategies. In 2014, the firm received $5 million funding from Mumbai based realty development group Karmvir Avant Group. PepperTap has raised around $10 million from SAIF Partners and Sequoia Capital.

Experts opine that the Return on Investment (RoI) in this industry is expected to be excellent, considering the Indian demography and consumer behaviour. Further, it would also depend on the monetization model within this industry. “Grocery in India is a huge market and grocery shopping on mobile is already seeing strong adoption. We believe that hyperlocal marketplace approach is the most efficient way to cater to this market, and can scale very rapidly,” said Ravi Adusumalli, MD, SAIF Partners.

Online grocery requires substantial capital investment. Operating in a single city maybe feasible in the short run, but to thrive and expand in many cities will require investment. “Investments in grocery start-ups will give a fillip to their operations and help in expansion across various cities and emerging markets,” explains Shailendra Singh, MD, Sequoia Capital India Advisors.

On the other hand, start-ups are of the view that there is very little support from accelerators, incubators and the government, as incubators and accelerators are great drivers of innovation, and government can help with regulations in making it easy to do business.

Future Outlook

New batch of start-ups, who have hyperlocal logistic model in place, seem to have gained significant traction and are likely to contribute towards the growth of this industry by providing innovation of service(s).

Moreover, with investors’ support there’s an opportunity to build billion dollar companies in the online grocery space. “If companies are successful at customer retention, this model will grow significantly and be well-placed to become a huge winner in the e-commerce sphere,” asserts Choudhary.

The future of online grocery market seems to be flourishing with the brick and mortar grocery stores waking up to the fact that consumers are increasingly shifting towards mobile technology and that they need to evolve.