An increasing number of Indians are switching to smartphones with 4G data connections and making online purchases. Thanks to this ever-increasing consumer base, the Indian ecommerce sector has witnessed a steady growth in the recent years. Currently at $53 billion in annual revenue, the country’s ecommerce industry is expected to exceed $100 billion by 2020.
It’s the food and grocery segment that is fueling this growth. According to a recent report by CRISIL, a rating and research agency, the online grocery business is set to expand at a compound annual growth rate of over 65 percent between fiscal 2017 and 2020. Overall, grocery-related revenue is expected to almost quadruple to Rs10,000 crores (around $1.5 billion) over these three years.
A startup retailer called BigBasket along with Grofers, a grocery delivery firm, and Amazon are leading participants in the nascent online grocery market in India.
It’s the food and grocery segment that is fueling this growth.
High-volume Factor
Ecommerce in India initially focused on electronics and apparel. Millennials drawn to Western clothing brands and electronics readily jumped on the ecommerce bandwagon. However, the initial interest in these segments is now slowing.
Groceries, on the other hand, are a high-volume business, though the per-basket size is small compared to electronic goods. People will buy, for example, processed foods, grains, and cleaning supplies at least monthly if not weekly. Ecommerce businesses are betting that grocery shopping will bring consumers back to their sites on a regular basis.
“If you want to transform a person’s shopping experience you need to look at where a customer spends the most time. The answer is FMCG [fast-moving consumer goods] and grocery. Customers interact and engage on a daily basis in this category. You don’t buy a mobile phone or a fridge on a daily basis,” said Saurabh Srivastava, director of consumables and FMCG at Amazon India.
While Amazon and BigBasket were the first to jump in, Indian ecommerce giant Flipkart unveiled its grocery segment on its home turf, Bengaluru, last year. Kirana11, a startup grocery marketplace (also in Bengaluru) is another competitor. And the recent Flipkart-Walmart deal is likely to redraw the online grocery sector map in the coming years.
Thin Margins
Selling groceries online in India is challenging. There is a high percentage of repeat orders, but the industry produces narrow profit margins. According to Raj Subramanian, founder of Paisool, another Bengaluru-based grocery startup, it has more to do with the lack of reform in the country’s agricultural sector and corruption-prone agricultural produce market committees.
“It’s a very touchy business to be in,” Subramanian stated. “Grocery is nothing but a distribution business. The only problem is that we’ve been used to generations of price-controlled food.”
To combat the thin margins, online retailers have to go higher in the supply chain and buy agricultural produce in bulk. In other words, online stores are creating their private labels or in-house brands to increase the profit, especially for staples such as grains, legumes, dry fruits, sugar, and processed foods.
BigBasket has three in-house variants: BB Popular (entry-level products), BB Royal (high-quality products), and BB Royal Organic (high-quality organic products). “On an average, private label margins vary from 25-45 percent, which makes them an important factor for profitability,” Hari Menon, CEO of BigBasket, told The Economic Times. “We are aiming to hit the Rs500-crore ($75 million) mark in March 2019.”
Grofers, on the other hand, offers premium-quality products under the labels G Mother’s Choice, G Happy Day, and G Happy Home. It offers entry-level products under the private labels HaveMore and SaveMore. The company plans to expand its private label business with the launch of 250 food and non-food products ranging from fruit jams and detergents to kitchen tools and accessories.
“We are targeting a revenue of Rs5,000 crores (around $750 million) by 2020 of which Rs3,000 crores (around $450 million) from private labels, that would be 60 percent of our total top line,” said Saurabh Kumar, founder of Grofers, in an interview with The Financial Express. “Today we have over 700 products within the Grofers brand of products of which over 250 products are in the FMCG space. This will increase to over 1,500 by 2019, wherein we will add another 500 items in the FMCG portfolio spread across various categories.”