Online Grocery stores mushroom across India

The challenges of selling groceries online remain, but some players are using different business models and technology to overcome them

Published: Sep 23, 2014 06:46:40 AM IST
Updated: Sep 18, 2014 12:54:14 PM IST
Online Grocery stores mushroom across India
Image: Chaitanya Dinesh Surpur

The buzz around online retail in India has reached a new high in the past few months, beginning with Amazon entering the fray in June 2013: There was the Rs 2,000 crore Flipkart-Myntra deal in May followed by the fresh infusion of funds ($2 billion for Amazon in India and $1 billion for Flipkart) in July, and Ratan Tata picking up an undisclosed stake in Snapdeal in August. The players are getting big, the money bigger.

What is significant, however, is that most online retailers in India sell books, electronics, apparel and accessories whereas groceries—which form the bulk of traditional brick-and-mortar-retail, a giant 60 to 70 percent of it—form a miniscule part of the total online retail space, which is worth $2.3 billion. And, there’s good reason for it.

Selling perishable goods online is far more difficult than selling non-perishables; storing and supplying fresh tomatoes is an entirely different ball game from storing and supplying cellphones. Online grocery stores are up against age-old local grocers who have built their loyal customer base on trust, reliability and quick, customised service. Selling groceries is a low-margin business (margins below 10 percent) although it requires expensive investments to build high-end IT infrastructure, an efficient supply chain, quality warehousing and storage facilities, and an efficient delivery system.

Consequently, investor sentiment remains unenthusiastic. Although BigBasket attracted a funding of $10 million from Ascent Capital in 2012, and more recently, Rs 200 crore from Helion Venture Partners and Zodius Fund II with Avendus Capital, others have received far smaller amounts or none yet.

Rahul Khanna, managing director of VC firm Canaan Partners, says investor interest is tempered by caution. “Understanding local needs across different cities has been a challenge. Mumbai is very different from Pune, let alone Delhi. How relevant are lessons from Mumbai in Pune or Bangalore? You almost have to create unique fulfilment, delivery models in each new city.”

While Canaan is yet to invest in any grocery e-commerce player in India, it has backed San Francisco-based Instacart, which provides a floating supply of grocery pickers and packer-delivered convenience at a premium.

An investor, who’s backed one such Indian firm, says all models in the e-grocery business today are capital-intensive. “These companies have to have a national presence to give people like us a meaningful outcome [exit],” he says, requesting anonymity.

However, in the shadows of the giants of Indian online retail, there’s a mushrooming of numerous online grocery stores that are experimenting with different business and delivery models: Dozens of them have set up shop in the past few years. Examples include BigBasket, LocalBanya, ZopNow, EkStop, AaramShop, MyGrahak, VeggiBazaar, Fresh N Daily and Farm2Kitchen.

Many of these are hyper-local, catering to single cities, sometimes even to only certain neighbourhoods of a city.

According to retail consultancy Technopak, the online grocery retail market is growing at 25 to 30 percent in the metros and other large cities in the country. “Urban India’s increasing shortage of time is fuelling the growth of online grocery,” says Pragya Singh, associate vice president, retail and consumer products, Technopak. “It is a largely standardised category; it doesn’t require much touch-and-feel as, say, apparel. Hence, online works fine. And it is highly convenient.”

Online Grocery stores mushroom across India
Image: Getty Images
Online grocery stores are up against age-old local grocers who have built their loyal customer base on trust, reliability and quick, customised service. Many of them are now trying to rope in local grocers to expand their business and meet the growing demand apart from ensuring speedier deliveries

Forbes India takes a look at three online grocery retailers that have developed business models that have been more successful than most others.     

VS Sudhakar (who had founded in 1999), Hari Menon, Vipul Parekh, VS Ramesh and Abhinay Choudhari

Founded in: December 2011

Cities it covers: Based in Bangalore; expanded to Mumbai and Hyderabad in 2013; aims to cover two more cities in a year
Funding: $10 million from Ascent Capital in 2012; Rs 200 crore from Helion Venture Partners and Avendus Capital

Target: Earlier in September, BigBasket announced that it had crossed a million orders since it started three years ago. With an average of 5,000 orders a day, it is now looking to go up to 15,000 orders across five cities a year from now.

Challenge: “A normal non-grocery e-commerce basket contains one to three items. On an average, we deliver 24 items [per basket], including heavy items like 5 kg of sugar, 5 kg of flour and 20 kg of rice,” says Sudhakar.

Solution: The long-term solution to this problem of weight and volume may lie in a hybrid model in which lighter items are shipped nationally (inter-city), whereas provisions such as rice and pulses are delivered locally.

BigBasket sources from local vendors and stocks goods in its own warehouses. However, relying on vendors’ stock-keeping alone would be able to fill only 70 percent of each order at any given time, so Sudhakar uses algorithms to pre-empt the need for certain items and buy them in advance, thus claiming a 99.3 percent fill rate.

The company has about 11,000 stock-keeping units (SKUs) and is looking to increase it to 20,000 in a year. It is also increasingly automating deliveries: It has developed algorithms to manage delivery routes and determine traffic-free ones to ensure speedier deliveries.

Opportunity: “My potential market opportunity from just the top 10 cities alone is the same as any other [online retail] category across the whole of India,” says Sudhakar. This is reason enough for him to not look beyond the biggest cities, and spread himself too thin. And this might be the right strategy because “grocery is a hyper-local business, where you establish yourself in one catchment area before moving to the next,” says Technopak’s Singh.  

Karan Mehrotra, Amit Naik, Rashi Choudhary

Founded in: October 2012

Cities it covers: Mumbai, Navi Mumbai; plans to cover more cities by next year

Funding: Undisclosed investments from Springboard Ventures, and Karmvir Avant Group. In talks for a second round of funding of $5 million.

Target: Institutional clients (restaurants and eateries) account for a third of its business; senior citizens and NRIs another 16 percent. LocalBanya now gets about 750 orders every day, and is targeting 1,000 by year-end. It claims to be growing at 30 percent month-on-month, has a fast-expanding vendor network, and an improving basket-size (number of items in every order).

Online Grocery stores mushroom across India
Challenge: CEO Karan Mehrotra hasn’t forgotten the tough times when LocalBanya started out. “Initially, the challenge was about acceptability. We were still trying to sell the idea of online grocery to customers and vendors. Now we have about 300 to 400 vendors supplying us.” But the “perishable nature” of groceries continues to pose a challenge, he says.

It has developed a lean business model that relies on a combination of direct sourcing (from farmers and the Agricultural Produce Market Committee), warehousing and cash-and-carry for procuring its stock (it now has 8,000 SKUs).

Outsourcing various requirements has also cut costs, resulting in margins of up to 20 percent. Mehrotra says, “Tying up with specialist companies at various steps of the value chain has helped us reduce the cost burden. Financially, we are freer.”

What it has kept for itself are the supply chain and technology infrastructure. It is investing in inventory management and focusing on customer-retention. “Grocery is a high-purchase category; you need groceries every week or every month. Hence, getting a repeat customer is easy,” says Technopak’s Singh.

Opportunity: With a high-order fulfilment rate, a healthy balance sheet and a fast-growing target market, LocalBanya might be well-placed to break even by next year.

Mukesh Singh, Bal Krishn Birla (left the company in August 2013)

Founded in: September 2011

Cities it covers:

Investors: Accel Partners, Qualcomm Ventures and Times Internet in July 2012

Target: Singh is keen to explore a hybrid model now where the company partners with large retail chains like HyperCity as well as local vendors. It currently stocks about 10,000 SKUs.

Challenge: Sourcing and warehousing goods with minimal involvement while continuing to focus on technology and delivery. CEO Mukesh Singh is also cautious about how the market is evolving with a host of multi-channel players coming into the space. “The future isn’t just about being online or offline, but things co-existing in a hybrid model,” he says.

“We think of ourselves as a technology company [that is] building a platform for more people to come and sell products online,” says Singh. By tying up with the HyperCity chain, ZopNow can leverage HyperCity’s storage and sourcing strengths. In its first pilot project in north Bangalore, HyperCity sources goods that are listed on ZopNow; ZopNow then identifies a HyperCity outlet and deploys a team for pick-up, packaging and delivery.  

Opportunity: What separates ZopNow from other online retail grocers is its “three-hour delivery” promise. Now, streamlining the business by forging new kinds of partnerships with existing online and offline retailers is its focus. 

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(This story appears in the 03 October, 2014 issue of Forbes India. To visit our Archives, click here.)

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  • Manali Bakshi

    In the beginning when online grocery shops were launched, people used to think twice before making the online order. However, things have changed with time and now online grocery shopping is completely in. This is the greatest way to get the most important task for the week done in a few minutes. My personal favorite is BigBasket. Saving on grocery shopping has become easy too, thanks to the coupon sites such as GrabOn.

    on Aug 22, 2016
  • Online Grocery Store Nagpur

    It's a great article for grocery shop owners and new online grocery shop owners to know good things about grocery in India.

    on Apr 20, 2016
  • Prashant Mittal

    All the biggies (Flipkart, Snapdeal, Zomato etc) are enjoying external funding. When you are not in profit for next 50years what is the use of such a business. Can anyone claim (tell) that in how many years will these companies can be in actual profit. Paying high-salaries, high-rented-properties, expensive-hotel-meetings-and-seminars, expensive-server-space and a long list of undue expenses that a normal businessman will never do. Recently, I planned for online grocery home delivery business. during the initial survey, I was amazed to notice ultra-low-profits, hence, dropped the idea. Even if you have a rented warehouse instead of your own, you may get costlier than your competition. You may not have an air-conditioned store. It will also make you costlier. Grocery will kill the investor. See what happened to walmart in India. I may be pointed for small thinking, but this is the foundation of business.

    on May 21, 2015
  • Sadeep

    While amazon India is already in, Flipkart, buyonkart and askme is planning to get in to this category.

    on Apr 26, 2015
  • Shailesh Lambe

    This is wonderful an article covering the challenges of online grocery shopping. Well, the problem of storage and especially of perishable item looms large over online grocers and must be addressed tactfully and economically. Fastest and flawless delivery (without missing a single item in the list) is a real challenge here. This invites our attention to Learning and Development wing which has pivotal role to play. Creating that sense of fulfilling each order with equal zeal and accuracy which the employees display while packing the first order needs to be maintained. Rather creating service oriented culture in e com industry is a must! According to Mr. Singh, Senior Director, Spire Research and Consulting, Indian E Commerce Industry is set to see consolidation in the next five years as not all the organizations will be able to survive and expect lot of mergers happening. Fully agree with the comments by Mr. Sreekanth & also to Mr. Vatsal about the impact it may create once biggies like Reliance Fresh & Aditya Vikram Group Chain's which have already resolved to go online. Organisations like Big bazaar has its presence across the country and they have the money power too. Let's not assume that Mr. Kishor Biyani who recently joined hands with Amazon to sell its merchandise will just sit back and see the game unfolding. Leaders like him will surely come to bat the moment it needed for their business. However, the competition will only help the market grow and let's not forget the beginners benefit. Today all the e com companies are providing maximum discounts to its customers to increase their loyalty base but in e grocery shopping, cost of and accuracy in delivery, infrastructure, logistics and warehousing will be a major challenge and hence needs to be looked at with different perspective altogether. Moreover, the consumer will be very happy if the industry can come up with a model to provide the stuff directly from the farmers keeping the mediators (who earns maximum benefit and regulates the pricing in the market) at bay. This will bring the prosperity back to our farmers and even the consumers will not have cry for the prices of some basic vegetables like onion, tomato and coriander. Looking at the inflow of funds in e commerce industry, 243 million internet users (As per Brand Equity Foundation, Commerce ministry) in India and 1 million online retailers surely promises good days ahead to all forms of e commerce business'.

    on Nov 4, 2014
  • Sreekanth Yelicherla

    Online grocery sites will eventually die. It is just a matter of time how quickly players like Reliance Fresh start the online operations. It is already in news that Reliance is planning to enter the online space. The other reasons being, the sites like zopnow, bigbasket are expensive compared to stores like Reliance fresh, Total, MORE etc. Compare the price of a 5 kg rice packet with Reliance fresh and bigbasket or Zopnow. Not just that I've noticed the sellers like zopnow, bigbasket are selling at MRP with nil discount. On the other hand, physical stores provide good discounts. For a family, online grocery stores are expensive. Customer service is another bad thing with online stores. I've shopped 3 times till now with bigbasket and 1 time with zopnow. Zopnow is worst when it comes to customer care and delivery. They missed some items during delivery but they didn't care to inform me well in advance killing my whole idea of saving time buying online. Bigbasket is excellent with on time delivery and the quality of groceries is superb. But in case of concers their phone number never gets answered and the emails never gets reply. But I always liked bigbasket for their prompt delivery. Surely, I'll use Reliance Fresh online stores in future as the prices are slightly slower and quality is equal or better.

    on Sep 26, 2014
    • Vatsal Dedhia

      Online Grocery Stores needs to rework on the issue, right from warehousing to logistic to ensure their survial. The key challenge for all online grocery site is to solve back-end issues, improve services and create/ reinvent a suitable business model. We can say that online grocery sites are struggling within themselves . If they overcome all these, lots of opportunity and scope ahead. Its not about reliance entering the digital space but its about the existing bricks and mortar, its about making people believe in it. And Sreekanth the delivery problem you faced was only due to unorganized infrastructure and even there are some online grocery stores which gives a pretty good discount.

      on Oct 20, 2014