Are e-grocery Businesses Surviving on Venture Capital Funding?

We understand that the recent shutdowns of some big e-grocery companies have sent shock waves across retail analysts and investors on actual potential of e-grocery businesses in India. While the e-grocery format is doing quite well in international markets, we are still struggling to find our hold in terms of profitability and sustainability.

In 2011/12, when more than 40 e-grocery companies began operations, everyone was over-optimistic, given the size of total Indian grocery market and the vastly underpenetrated online grocery sector. However, today only a few of these startups have survived, despite funding from venture capital firms.

This has raised doubts on profitability of e-grocery as a business model and has put further pressure on existing players to prove themselves within a shorter time span. One looming question is if the businesses are surviving only on VC funding. Before arriving at any conclusions, we should understand the nuances of the sector.

Kiranas control 90% of the grocery market and modern retail trade is remaining 10% with e-Groceries a rounding error (but about to explode). While Kiranas carry very limited stock keeping units (sku) – 2,000 vs. 25,000+ carried by hypermarts, Kiranas offer the ultimate convenience of neighborhood on-demand fulfillment vs. large format stores that carry range @ value but are far off. E-Groceries can mix and match the best of both – large range and at your door convenience, only if the unit economics of delivering bulky, perishable, and low value items can be worked out.

Given little product differentiation in large hypermarts and e-Grocers, the only differentiation possible is to increase back-end process optimization to reduce cost of inventory management and delivery. It is this complex equation and the lack of it that has pushed some businesses into a downward spiral. We need to delve a little deeper to understand what constitutes this equation, to understand why some companies failed, while others are still sustaining a healthy growth.

Customer Acquisition Strategy
The core value proposition of online grocery platforms is the convenience of placing orders through website and mobile apps, choose a delivery time suitable for the consumer and order from variety of products at discounted prices. Majority of e-grocery startups tried to acquire customers only through discounts, in anticipation that once a critical mass is reached, they would reap economies of scale in delivery and inventory costs. However, this model could not retain customers due to low bounce-back rates, low switching costs (customers chose new grocery store that offered better discounts) and loopholes in service quality. The true value is in providing on-time delivery of high quality products through a convenient, personalized and transparent interface and not dependent on discounts to attract and retain customers.

Business Model
In the beginning, majority e-grocery businesses started with inventory-led model, which proved to be highly capital-intensive and inefficient due to lack of proper inventory management and expensive delivery given warehouses set up on outskirts. Another set of companies followed an aggregation model, wherein they tied up with local kirana stores and delivered the products based on orders. However, for some this involved higher cost of pick-up and return, creating overall inefficiencies. In both these models, some startups have shut shop while others have sustained. A third model where aggregators pick up from large hypermarts is gaining credence and ZopNow and AmazonNow are key proponents of this model.

Delivery Model
Another problem is delivery. Majority of Indian households that order online are scattered, creating a dispersed delivery route and added cost of order returns. Added to this is the low average order value between INR 300-600 that merely covers the costs of delivery. One solution that some retailers have adopted is increasing the minimum order of purchase, which seems to be a lucrative solution for sustainability. Nonetheless, processes of order management, inventory distribution and delivery need to be stitched together with technology so that predictive analysis and real-time assessments can be made when needed.

What is needed is a strong technology platform that makes the entire buying experience personalized for customers through real-time analytics, recommendations and order scheduling based on historical order dates. This needs to be backed by strong procurement, inventory management and delivery strategy, making the whole model sustainable.

What we have witnessed so far in the online grocery retail is normal for any new sector in nascent stages, because everyone is experimenting with business model – service differentiation, value proposition, and back-end processes in delivery and supply chain. Some of these experiments are bound to fail. Therefore, what makes few companies to sustain more than others, is the ability to experiment, fail and re-strategize in a fast and efficient manner. Also, it is currently a dispersed market with few big players and is bound to undergo consolidation. Hence, we should be ready to see M&A activity in coming years. All said and done, the online grocery sector is still a highly lucrative one from standpoint of customer demand and overall market size projections. All that is needed is for players to pre-empt what can work best, apply technological expertise and scale-up from there.