Go carting online

A bunch of online grocery store start-ups are ensuring that the only shopping minutes you waste are for adding items from your list to your e-cart

 If there is one business that is crying out loud for disruption, it is the groceries segment. Let’s face it, the process of buying groceries involves multiple pain points at present — right from finding a parking spot, to jostling with other customers in the aisles as you shop, to waiting in a queue where time stands still as the new trainee tries to figure out the barcodes for billing. A very simple business proposition that could help you take care of this cumbersome ordeal would be to take this process online.

For businesses, it would be like hitting the jackpot, as most households spend a chunk of their money buying a predictable set of products week after week, no matter which way the economy is heading. And yet, the online grocery business has been a tough nut to crack across the globe, barring a few success stories such as Ocado (UK), Yihaodian (China) and FreshDirect (US).

Biggest slice of the pie

Food and grocery constitute two-thirds of organised retail

Even Amazon, which recognises groceries as the last piece of a puzzle that it has to solve before it can rule the online world, has taken it slow on this front, expanding into San Francisco and Los Angeles just last year after delivering groceries in and around Seattle for five years. While that list will soon expand to include many more cities across the US and the world, it will be some time before Amazon is able to put together the very last piece of the puzzle. 

In India, though, the concept of e-groceries is slowly starting to capture the public’s imagination much faster, with companies receiving $80 million-90 million seed funding in the past three to four years. Still a very small part of the retail pie collectively making roughly ₹400-450 crore in turnover, this bunch is growing at a pace of 20-25% on a month-on-month basis.

The potential — in terms of market size — is huge: the Indian retail market is pegged at around ₹304,200 crore, with 92% still falling under the unorganised sector. While groceries make up 60% of the total pie, most of the market is still addressed by kirana stores. “India has low supermarket penetration — 90-95% of consumers are serviced by kirana stores. (see: Biggest slice of the pie) This leaves room for e-grocery players to come in and disrupt the market,” says Abhishek Shah, vice-president, Unilazer Ventures, which has invested in Mumbai-based online grocery Ekstop. “This category has the largest repeat consumption basket of the urban Indian consumer — and almost all of it can be serviced through online e-commerce.  We are a home delivery and service-obsessed country,” he adds.

Early failures

Serial entrepreneur and investor K Ganesh strongly believes in the potential of the online grocery business. In the past, Ganesh has spotted opportunities in the BPO, analytics and online tutoring sectors ahead of the market and built successful businesses. After selling his last business — which involved online tutoring — to Pearson, Ganesh was looking for businesses that would leverage technology and the internet to solve existing pain points, and groceries were the first to catch his eye. But when he tossed the idea around with a couple of venture capitalists, there was hardly any interest.

“They would quote Webvan as a case study for why online groceries won’t work or would say there are no margins in bread and eggs. It was clear that nobody had a clue about the business,” says Ganesh, who then went on to incubate Bengaluru-based online store BigBasket, the largest player in this space. Webvan was an online grocery in the US that declared bankruptcy in 2001, three years after its launch but not before blowing up $800 million in venture capital and IPO proceeds by expanding too fast. 

Ganesh knew that with the right team, the online groceries business could definitely be a winner and that Bengaluru had a ready talent pool. It was here that VS Sudhakar, Hari Menon, Vipul Parekh and VS Ramesh launched an e-commerce portal called Fabmart in 1999, much before e-commerce became a buzzword. The site sold everything from books and music to even groceries.

However, given the slow bandwidth speeds and low penetration of the internet at the time, the venture didn’t really take off. In 2003, it was rebranded as Fabmall and launched as an offline grocery store, subsequently merged itself into Hyderabad-based retail chain Trinethra. It was acquired by the Aditya Birla Group and rebranded as More in 2007; the online arm was merged with Indiaplaza. Fabmart was one of the first customers at Ganesh’s BPO venture.

After selling off its offline grocery venture to Aditya Birla, the Fabmart team had moved on to different roles when Ganesh got them thinking about an e-grocery business. This was when Abhinay Choudhari, who was running an e-grocery portal called Shopasyoulike at the time, joined the team and they launched BigBasket in December 2011 in Bengaluru. In the next three months, BigBasket raised $10 million from private equity firm Ascent Capital, which helped it scale the business. Demand has been growing at a blistering 15-20% on a monthly basis, with the company extending services to Hyderabad and Mumbai in 2012. Its 600-strong team services around 5000 orders across all locations, with the average ticket size being ₹1,500 per basket.  

When it started operations, BigBasket adopted a just-in-time strategy for inventory management, sourcing the bulk of its requirements from Metro Cash & Carry and other smaller vendors. But as the business scaled and it started to offer same-day delivery in February 2013, the company buys products from FMCG manufacturers, farmers and mills and stocks them in its warehouses in Bengaluru, Hyderabad and Mumbai.

In Bengaluru, it follows a hub-and-spoke model, where goods are sent to hubs and picked up by vans for delivery. In other cities, since the customers are not as spread out as they are in Bengaluru, the company delivers straight from its warehouse. The model seems to have paid off; In FY15, BigBasket hopes to clock more than ₹200 crore growing on 15-25% on a month-on-month hopes to touch ₹3000 crore in 2018 driven by its expansion plans. “We expect Bengaluru to break even by the end of this year at the operations level. We should be able to break even in every city we enter in two to three years as operations mature,” says Parekh, now CFO, BigBasket.

Plans are in the works to expand the business to six more cities in the next two years. “We plan to enter Delhi NCR and Pune by the end of 2013,” says Sudhakar. Chennai, Chandigarh and Ahmedabad are on the cards for 2015. The company has just raised ₹200 crore in its next round of funding led by Helion Advisors, Zodius Capital including existing investors Ascent Capital and LionRock Capital.

“This business is all about scale and quite capital intensive. It is only when you reach a certain level that FMCG majors see some value in engaging with you,” says Ramesh. And scaling up takes time — the customer clicking the ‘place order’ button is the only easy thing about this business. Unlike e-commerce, where you can sell anything from a book to a TV to pet food and service the entire country with a few centralised warehouses, here, you need to build presence ground-up, one city at a time. “It is a modular business that can be replicated in different cities but we have to scale up one city at a time. We can’t do a pan-India launch like other e-commerce players,” says Menon, CEO, BigBasket. 

Delivering comfort

Managing logistics in an online business can be challenging; add same-day delivery and perishables to the list and it could be a recipe for disaster, if not executed well. So, e-grocers rely on technology to manage both logistics and inventory. BigBasket, for instance, has all its delivery vans fitted with GPS, which provides optimal routes for its deliveries and helps the company track the vehicles. The drivers get handheld devices with built-in apps to show different payment modes and the time taken to reach the destination.

“Companies need to know how to leverage technology and improve efficiencies and customer experience using analytics, apps and software, apart from having a good understanding of how the retail supply chain and distribution works,” says Ganesh. BigBasket’s customised inventory management software takes into consideration customer buying behaviour, the ability of its supplier to match demand and the seasonality of the product before deciding on the minimum inventory required. Thanks to its accuracy, the company needs to stock inventory only for 10 days, much lower than the levels maintained by offline stores. According to Pragya Singh, associate vice president, Technopak, offline stores on an average stock up to 15-25 days of inventory.  

Mumbai-based online grocer Ekstop also uses technology to not only manage inventory but also analyse product-by-product sales on a daily basis and decide whether to continue stocking that product. For CEO Sumat Chopra, the seeds for Ekstop were sown as a student at Carnegie Mellon and Harvard. Chopra discovered that stores closer to the campus were almost twice as expensive compared with the rest of the Walmarts and Costcos in town.

“With shops close to the campus proving to be expensive, it was a nightmare for most students to go grocery shopping after finishing their studies and projects. It was then that I realised that the pain points of grocery shopping in the US were similar to those in India,” he says. So Chopra set up a website where students could place orders, and partnered with Walmart and Costco to deliver the goods on a weekly basis.

After a five-year stint in the corporate world, Chopra decided to return to India around 2010, eager to start a venture. On realising that he would be better prepared with an MBA, Chopra proceeded to join INSEAD, meeting Ekstop co-founder Shaurya Mehta there. Soon, the duo managed to raise angel round funding of $200,000 to power their idea, which crystallised into the launch of Ekstop in May 2012. The e-grocer is planning to extend its services from the current Mumbai, Thane and Navi Mumbai to Panvel and Pune by the end of 2013. “The grocery market in Mumbai alone is worth ₹3,042 crore, and if organised retail makes up 5%, there is significant headroom for all players to grow,” says Chopra. 

Funds have been quick to spot the growth: Unilazer Ventures took a 25% stake in the company earlier this year for an undisclosed amount. Ekstop handles up to 800 orders a day, going up to 1,000 orders during peak times. It currently deals in about 10,000 products and even offers same-day delivery.

Cashing in

Ekstop is not the only one to try this gimmick: online grocers often use two-hour windows throughout the day (across six slots) when the customer can choose for the products to be delivered the same day. The companies need to operate with precision as most of the orders contain perishables and taking goods back is never a good option. They also have to ensure that the customer experience and the quality of the products remain consistent during every single delivery.

For instance, if the customer orders groceries three to four times a month on an average, compared with just one or two orders on other e-commerce sites, just one bad experience could turn the customer off forever. That’s why almost every online grocer has a no-questions-asked return policy.

Also, unlike in general e-commerce orders for merchandise such as books or electronics items, where the shopping cart contains a limited number of items, grocery orders contain at least up to 25 items, and companies have to ensure the fill rate is high. While BigBasket has a fill rate of 99%, Mumbai-based online grocers Ekstop and LocalBanya have fill rates of 98% each. 

Like Ekstop, LocalBanya is the brainchild of three friends who got together to start something on their own. Karan Mehrotra and Amit Naik were friends from college, but after their engineering days, they set out on different career paths. While Naik worked in the technology sector, Mehrotra joined the family food and distribution business, supplying to hotels, restaurants and flight services.

While he was toying with the idea of starting an online grocery business, a neighbour sourced a special kind of rice from Mehrotra’s business, was impressed by the quality of the grains and started sourcing from the company regularly. Soon, word spread, and several households began turning to the company for their weekly purchases. So, Mehrotra and Naik decided to come together and set up LocalBanya with acquaintance Rashi Choudhary in May 2012.

Today, the company has over 170 employees, who help deliver groceries across Mumbai, Thane and Navi Mumbai from their warehouses in Goregaon and Rabale. Unlike BigBasket and Ekstop, LocalBanya follows a just-in-time model to source its products, aggregating orders from its 250-odd vendors and delivering the very next day. While LocalBanya retails 10,000 products, it only stocks 700 products that it considers the fastest moving. “We don’t want to replicate the infrastructure that has already been created. Big retail has invested large chunks of money creating the infrastructure and we want to leverage that,” says Mehrotra, now CEO of LocalBanya.

The company delivers up to 700-750 orders a day with an average basket size of around Rs 1,300. While the trio has invested ₹70 lakh as seed money, LocalBanya has also been able to raise $20 million from BCCL’s Springboard fund, and real estate group Karamvir Avant is said to be in the final stages of closing its series B round of funding. While plans are on to expand to other cities, Naik feels that it is important to streamline operations in Mumbai first. “We are looking at other cities, but before we do that, we want to completely leverage the growth opportunities in Mumbai,” he explains. 


For online grocers, the population density in a city such as Mumbai works in their favour because they can deliver far more orders in a given area. “We are not constrained by demand but by capacity. Logistics and inventory management can be challenging as most vendors don’t have a stock of the inventory, let alone having those figures in real time in our systems,” says Naik . There is no denying that online shopping offers a definite edge in terms of convenience over your neighbourhood kirana. “We are not looking to replace the kiranas.

What's in your bag?

Snacks and food grains dominate the average grocery shopper's bag

We just want to offer customers the range of a supermarket with the convenience of shopping from a kirana,” says Abhinay Choudhari, director, BigBasket. Which makes sense given how much we depend on the neighbourhood kirana to get us that last-minute load of bread or bottle of milk, despite our monthly shopping trips to the supermarket. “Kiranas deliver one or two items sometimes in 30 minutes taking orders through the phone and no minimum delivery requirement. That convenience is hard to beat,” says Technopak’s Singh. And the e-grocers agree they are not quite there yet. “We are still figuring out how to address that segment of meeting last-minute requirements,” says Choudhari. 

While there is definite potential to scale the e-grocery business, the devil is in the details, as online groceries would need to be profitable on the customer and unit levels. According to BigBasket’s Parekh, the gross margins in a retail business are around 20%. For offline players, rent makes up 6-9% of revenue, depending on the location, employee costs make up 4-5% and then you have to add corporate overheads to the mix. For online players, logistics costs take the place of rent, but more or less remain capped at 6%. 

Even if one were to assume a similar employee cost and overhead structure, the difference where online retail stores score over offline stores is in shrinkage costs, where it ranges from 3% to 5% of sales for offline players and less than 1% for the online ones. Shrinkage costs are due to unsold inventory and goods lost or past their expiry. The key to improving profitability would be by increasing the share of fresh produce, which is currently at 10% but enjoys higher margins of 30-40% and increase the share of its own brand products. For instance, the share of BigBasket’s own brand products is well over 40% of revenues.

Online grocers are also looking to increase the average value of the shopping basket. “We are constantly looking to sell a more profitable basket by including high margins products such as organic and international range of products,” says LocalBanya’s Choudhary. To top all this, better inventory management could add almost another percentage. With all these factors in play, a net profit margin of 6-7% is possible for e-grocers, while offline players manage just half of that figure.  

All said and done, none of these players seem to be making money at present, but the equation looks clearer for the e-grocers who can run a tighter ship at lower investments. However, scaling up the business is not going to easy. “While the online grocery business does have positives of standard and high frequency purchases, it is a tricky business to scale up since it comes with such a complex supply chain which you have to replicate in every city you enter,” says Technopak’s Singh.

According to her. while it will be easier to scale up in the top 8-10 cities over the next few years, capturing the fancy of tier II and III towns will be challenging unless the online grocers are able to capture a niche for themselves. Investors like Jayesh Parekh, managing director of Jungle Ventures, which invested in the angel round funding of Ekstop, believes there will be more converts as the whole connectivity infrastructure improves.

Infrastructure in e-commerce is India is developing and should be on par with the rest of the developed countries in the next five years bringing more people online feels Parekh. “India is a market that is much grocery-driven. Most homes have at least one fresh cooked meal daily and grocery is a large share of the retail spends.  Consumers shop more frequently for groceries and fresh products, which makes online grocery a high-touch business,” he adds 

But, eventually, it all boils down to execution and how much money the businesses burn in expanding fast and paying to acquire customers. “You need to have a numbers and metrics-obsessed team — the second decimal matters in this business,” says Unilazer’s Shah. While companies have the challenging job of figuring out how to squeeze out those wafer-thin margins, consumers just have to click their way to a better deal.