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Friday, November 27, 2020

Online Grocery: What is the next frontier of growth?

The rapid growth in demand, adoption in non-metros, and customer stickiness have established that online grocery is a real and growing retail business. The challenge is to innovate and bring out-of-the-box ideas hereon.

No customer-retailer relationship is as intense as in grocery. Transactions are frequent, customer needs are mostly predictable, and sellers can count on stable revenues. Multiple players have long tried to replicate this relationship online.

Madhur Singhal,
MD and Practice Leader,
Technology and Internet,
Praxis Global Alliance.

However, even today, online grocery is just 2.3% (or $160 billion) of a worldwide grocery market of $7 trillion. The current year has marked an inflection point in online grocery across the world where the outbreak of Covid-19 has set the stage for a permanent shift in consumer behaviour. This has seen the scaling up of infrastructure to deliver groceries online.

This shift is especially evident in India, a market with relatively low penetration (0.5%, FY20) of online grocery. With an expected CAGR of 50% between FY20-24, online grocery gross merchandise value (GMV) of $3.2 billion today is expected to rise to $24 billion by FY25 in India. This is a significant shift.

In 2015, one of India’s two largest ‘online grocers’ pulled out of nine cities, lamenting the ‘low acceptance of its service in these areas’. Another player that used to source products from local shops (an early pioneer of the 3P-marketplace model) ceased operations the same year.

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India seems to have come a long way from this. Today, there is optimism and growth. E-grocers such as Bigbasket crossed a GMV of $1 billion recently. Grofers, another e-grocer, is ramping its private label brand portfolio substantially making branded products accessible to mass customers. The launch of JioMart as an online marketplace with an integrated supply chain to kirana stores is set to make convenience stores digital. They will take orders on WhatsApp and deliver in their micro markets.

In this intensely competitive market short-term operational challenges have been overcome and the segment is flush with capital. Enterprises with successful online grocery operations in the new landscape emphasise these four activities.

First, is a relentless focus on growing fresh/daily deliveries. This has been the Achilles heel for a long time. Some have tied up supply but struggle in delivery. Others have the delivery but have not been able to source, handle, and deliver fresh produce. Less than 5% in any major online grocer’s sales are from fresh/perishables compared to typically upwards of 60% at a traditional grocer/kirana store.

Second, is to leverage technology to solve micro problems of efficient picking, article sorting, and wastage reduction. As the focus on eliminating errors on sourcing, price and waste becomes even more heightened, a huge backend of warehouses, trans-shipment hubs, and dark stores will get automated. Artificial Intelligence will be used to allocate inventory and set prices. SaaS tools are already being used to optimise cargo load planning, form-factor (van-bike) mix, and last-mile route optimisation.

Third, is the integration of supply chains. The recent investment of a leading online marketplace in a fresh produce supply-chain startup is a harbinger of ‘convergence’ of supply chains which we will increasingly see in the next few years. Successful marketplaces and value-chain participants will backward integrate to truly become ‘farm-to-fork’, manage quality, and unlock margins across the value chain.

Fourth, is brand partnerships and brand creation. While the incumbents are re-orienting their systems to suit the needs of the e-commerce channel, the Internet-first brands are quickly taking this window of opportunity to ride the fast-growing online channel.

There are already nine distinct operating models in which e-grocers are playing in line with an assortment of products served, micro-market requirements, and scale of operations. The transition from e-commerce to omni-commerce i.e. e-commerce 2.0 has already taken place in grocery, and this will successfully nudge customers who were previously reluctant to have someone else pick fresh food for their family to shop online. A ‘same hour, same day’ industry standard for last-mile delivery will fulfil customers ‘need it now’ shopping requirements in this category.

The rapid growth in demand (annualised CAGR of 50% even pre-Covid-19, adoption in non-metros (1.6-times growth in non-metros compared to metros in recent months), and customer stickiness (almost 80% customers do repeat monthly purchases) have established that this is a real and growing retail business enabled by the Internet and data.

However, the next wave of growth will not come from doing the same things, but rather improvising maniacally and fundamentally altering the cost structure and the operating model.

Madhur Singhal, MD and Practice Leader, Technology and Internet, Praxis Global Alliance. Views are personal.

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