Online Grocery
After the hype around online grocery died down, the market has now matured, business models have evolved and demand has been generated.

‘Food is the next big thing in ecommerce’, is a statement that has made headlines on several occasions over the past few years. Latching on to the euphoria of online grocery, 302 online grocery companies were started in 2015 and over 24 last year, according to data from Tracxn. Some of the popular ones that sprung up were BigBasket, PepperTap, LocalBanya, AAGAAR.com and Grofers.

At a time when physical supermarkets owned by large conglomerates such as Reliance Industries, Aditya Birla, Future Group were struggling to get enough footfall and facing narrow losses, the prospect of online grocery was indeed bright.

There was investor appetite in the sector as well. A testament to this was the fact that 19 online grocery startups raised $281.5 million in 2015. Some of the initial players such as BigBasket and LocalBanya were already claiming to be on the verge of profitability.

But the honeymoon didn’t last too long. The dry spell of funding that 2016 saw hurt the grocery sector too. And this was when business models were put to test.

The decline of online grocery startups

On-demand grocery startup LocalBanya shut operations in 2015. PepperTap, which raised over $51 million from big ticket investors such as Sequoia Capital, SAIF Partners and Snapdeal shut down operations around April 2016. Delhi-based AAGAAR.com too, shut shop in June 2016. Forget profitability, BigBasket’s losses rose four-fold to Rs 277 crore for FY16.

Flipkart too attempted to enter the segment in February 2016 with a grocery app ‘Nearby’, but shut down operations in five months.

If food was indeed the next big thing, why were these startups shutting shop?

Like the Tiny Owls and Swiggys of the time, these startups were spending too much on customer acquisition. Being a new concept, the demand was not quite there yet. Some players were losing cash on every order. But they continued to expand widely and fast and funds eventually dried up.

“The startups that shut shop followed the on-demand hyperlocal mode, which is a ridiculous business model. That’s why they failed. BigBasket survived because it had its own inventory, distribution centre and directly distributed orders to the customer. That is the business model that can be sustained,” says Arvind Singhal of Technopak.

Grofers, which runs a hybrid model (a mix of investor-led and hyperlocal model) too has managed to survive.

Cut to 2017.

Armed with funds, Amazon has been growing its grocery segment widely in India. It received regulatory nod for food retail. News reports emerged that Paytm was looking to enter the market by acquiring BigBasket. Flipkart decided to take a second shot at the grocery segment with ‘Supermart’,

Grofers India’s Singapore-based parent Grofers International pumped in $14.7 million into the startup. BigBasket is growing too. According to a report in The Ken, it is processing 45,000 orders a day. It also raised $5 million from Helion Ventures Partners and others.

Brick and mortar supermarket chain D-Mart too, is reportedly running a pilot to let customers order online to be delivered at 40 neighbourhood kiosks for free or at their doorstep for a fee. Online classified platform Quikr is also looking to soon roll out an on-demand grocery and food delivery service.

And most recently, Chinese internet giant Alibaba has sought regulatory approval to acquire a major stake in BigBasket.

So after a bloodbath in 2016, why is there renewed interest in the grocery space? And why are the unicorns betting big on this category?

Renewed interest

A lesson has been learnt: An inventory-led model, and not a hyperlocal and asset-lite, is what will work for online grocery.

Customer habits have changed. Convenience is now king.

According to a report by Ken Research, the Indian online grocery market is expected to grow at a compounded annual growth rate (CAGR) of 62% to reach Rs 2.7 billion by FY19.

Report by Morgan Stanely estimates that the online food and grocery segment will become the fastest-growing segment, expanding at a CAGR of 141% by 2020 and will bring $15 billion to overall online retail sales.

“I’ve been saying this for years. I’m sold on the potential for food as far as online is concerned. No customer enjoys touching potatoes and tomatoes. If there is guarantee of good quality, customers will buy,” Arvind says.

Having said that, he adds that fruits and vegetables make up a very small part of the basket. Bigger items in terms of value are spices, pulses, cooking oil and other forms of dry grocery.

For unicorns such as Flipkart, they are reaching a saturation in several categories and flush with investor funds, they need to find new avenues of growth. And given the potential online grocery has, it is its best bet. When compared to most of the other categories these ecommerce majors sell in, grocery has better margins.

Now that demand has been generated, the only challenge will be to streamline supply.

“These startups will need to make some investments in the supply side as well. Supply chain is poor when it comes to perishables and that is where they will have to put some money and effort. Once they do that, the potential is significantly higher than any other ecommerce category in India,” Arvind adds.