Factors responsible for rising failure rate of online grocery startups

The experience of grocery shopping in our country has undergone a huge digital makeover in the form of online grocery service platforms, which have cropped up in recent times to keep up with our fast-paced lifestyle.
Online Grocery

Grocery shopping is one of life’s social activities, religiously carried out by people in their day-to-day lives. In India, groceries are usually bought in local ‘Kirana’ stores, a place that is both a marketplace and a social hub where you meet & greet your neighbors and exchange local news. However, challenging these social norms is an up-and-coming sector which promises the experience of grocery shopping from the comfort of your home.

The experience of grocery shopping in our country has undergone a huge digital makeover in the form of online grocery service platforms, which have cropped up in recent times to keep up with our fast-paced lifestyle. Several startups are coming into existence with the aim to disrupt the supermarket industry and make its services available across virtual platforms. Enabled by the power of Internet, these services facilitate its customers with wholesome shopping experience at their time and convenience.

According to a retail report led by global Information & Measurement Company Nielsen Holdings, one-fourth of global population have ordered grocery products online for home delivery and over 55 per cent have shown their interest to opt for such services in near future. Additionally, it was revealed that 14 per cent of global respondents chose to go for automatic online subscription services though which their orders wereregularly stocked at certain specified intervals. The report also states that 13 per cent of respondents currently use virtual grocery shopping stores and approximately 6 in 10 (58 per cent) people hope to access such services as and when they become available in their geographical area.Furthermore, the success of such online serviceshas prompted many offline retailers to upgrade their business models and enter the realm of E-commerce to gain more customers and maximize business reach.

The Asia-pacific region has now become a breeding ground for online grocery startups owing to rapid development and gradual shift of its urban population towards modern and well-planned cities. India, being one of the fastest growing economies in the world, owes it to the flourishing virtual domain. Since most people nowadays lead hectic lifestyles and are under perpetual stress to find balance between their personal & professional life, these on-demand online services certainly provide much required relief from daily chores. These virtual grocery stores are gradually becoming an integral part of tech-savvy millennials’ lifestyle who can now buy their groceries as and when they require at the touch or tap of a button.

However, despite its advantages and efficiency, online grocery startups are failing in the Subcontinent because of various economicfactors and other challenges. The current business model of online grocery shopping involves on-demand buying at the consumer’s end and facilitating product delivery solutions at the retailer’s end. So far, this business model cannot justify its cash burn scenario since these companies have not been able to generate any value, be it in building assets, brand loyalty or customer retention. Maximum costs are incurred in delivery services as it involves hiring trained delivery boys, plus additional transportation costs and establishing an organized delivery network.

In alignment with aforementioned factors, let us explore some key aspects which are responsible for rising failure rate of such startups.

Consumer Behavior
The Indian consumer loves to utilize the concept of ‘Value for Money’ in all aspects. Since a big chunk of our population belong to middle-class household, this concept is naturally followed by majority in order to make the most of available resources and is quite prevalent in their buying behavior. When it comes to online grocery shopping, the Indian buyer prefers to get maximum items at lesser cost, thus validating the concept mentioned above. By choosing to ‘save’ on additional costs they usually prefer to shop online only if there are on-going sales or slashed rates for particular products. Furthermore, online grocery service platforms lack the Trust factor which most people have on their local store owner. It is completely impersonal, which can be a boon for people who prefer lesser crowd but may not go well with the majority which usually consists of housewives and/or the elderly.

Local feel for food and grocery shopping
Having virtual access to multiple grocery productswhich can be browsed through at one’s convenience can be very enticing. However, people still prefer the allure of local grocery/supermarkets where they can actually see the products stacked in different aisles and also find out if these items are fresh or not. With online grocery services, guarantee of quality or freshness is a concern which usually keeps potential customers at bay from opting for such services, irrespective of convenience.

Startup ecosystem
Being a fast growing economy, India has become a productive landscape for budding companies to arrive and thrive in its highly competitive startup ecosystem. The sudden boom within this sector is encouraging many to ditch conventional jobs and embark in the risky realm of startups without considering other major aspects that come with this undertaking. Without meticulous planning, proper design structure & business model, most startups never make it till the end and without any set customer base, they are not able to generate steady revenues and thus, fail.

Quick scaling of operations
These days, most startups tend to follow a GBF (Grow Big Fast) rule, i.e. maximizing their reach in multiple areas rather than build the business and gain brand loyalty one place at a time. With an aim to augment business growth as quickly as possible, these startups develop aggressive expansion plans in various cities. But, low order volume coupled with operational inefficiencies that come with this practice forces them to withdraw services and in the process, incur huge financial losses.

High cash burn rate
Some online grocery startups have to incur huge financial costs if the revenue generation percentage is significantly lesser than actual costs incurred to complete the process, resulting in high cash burn rates.Cash burn rate is a measure which helps determine how quickly a company utilizes its investor/ shareholder capital. A synonym for negative cash flow generation, the affected startup may have to step up and begin making profits, acquire more funding, or shut down its operations altogether if it fails to replenish the capital in time.

Deep discounts
Online grocery services occasionally announce sale or deep discounts on some or all items under its inventory. It is a strategic practice which can help attract more customers and widen market penetration. However, announcing deep discount rates in regular intervals can disrupt the financial situation of a company as most people can misuse this opportunity and order items in bulk.

These challenges, despite causing huge financial losses are completely avoidable only if they are noticed in time. Such loopholes can be witnessed in any great business opportunity. Therefore, we can conclude that online grocery service providers need to step up their game and upgrade their business model in order to survive the highly competitive startup arena in India – and give consumers a better and efficient alternative to make their lives relaxing and stress free.

Authored By: Amit Singh, Founder & CEO, AllSuperMart

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