Shopping everything online is the new trend in India and the food and grocery industry is not untouched by this transition in any way. Though the initial years witnessed a dull scenario with slow retraction of startups due to many reasons that have forced them to call it quits, the year 2017 promises much more action in the segment with the online grocery market set for a big bang entry of Tata Group in the segment. Tata Group is venturing into online grocery business under Starquik brand, taking on majors like Amazon, Big Basket and Grofers that are already riding on this nascent yet rapidly growing market.
Impact of Tata’s Entry on Online Grocery Market
A pilot venture will be rolled out within the next two months as an online channel for Trent Hypermarket, an equal joint venture between Tata and British retailer Tesco. Tata Group runs three formats under Star banner — Daily, Market and Hyper. According to a company official, Trent plans to shut its smaller format Star Daily, which will help them cut costs in rentals and at the same time serve those catchment areas through online. Tata Group did not offer any comment. Since foreign direct investment is not allowed in retailing of multibrand non-food products offline or online, Tata’s latest initiative will be through Fiora Hypermarket (FHL), a subsidiary of Trent that acts as a separate service providing entity in terms of sourcing activities, warehousing and distribution.
The recent development by Tata Group has market speculating on its affects on the already existing players in the segment. However, Albinder Dhindsa, CEO and Co-Founder, Grofers, maintained, “Entry of Tata Group or any other company in the segment does not change the strategies of Grofers. 85 percent of our business comes from loyal users. We shall remain consistent with our promise of delivering low prices every day to them.” He also asserted that any new player in the category would help drive the category penetration and the e-grocery sector would benefit immensely from such developments. Hari Menon, Director, Big Basket, agreed, “Any new player entering the sector is good for the industry. It won’t affect Big Basket’s market in any way. Online grocery is a huge segment worth around UD$ 450- 500 billion, and we definitely need more and more players to address the entire market demand.”
It is interesting to note that this isn’t the first time that Tata Group is looking to venture into the online grocery market. Tata entered into online grocery market at the same time when Amazon launched KiranaNow in 2015. The e-grocery market has also seen the likes of Flipkart, Paytm Mall and Alibaba taking interests in the segment.
Tapping the Growing Market
Online food and grocery penetration is still less than 1 percent, suggesting the infancy of the category and its potential opportunity. Morgan Stanley expects online food and grocery segment to become the fastest-growing segment, expanding at a compounded annual growth rate of 141 percent by 2020 and contributing $15 billion, or 12.5 percent, of overall online retail sales. Offline players such as Reliance Fresh and Godrej Nature’s Basket have launched omni-channel initiatives, though the scale is not too big right now. But the opportunity offered by the $500 billion retail market is attractive for any player, foreign or local.
And tapping this opportune market is on the priority list of every emerging player in the segment. Grofers’ Dhindsa said, “The only way to drive consistent growth in e-grocery is through pricing. We refined our strategy in Q2 this year by focusing on a limited number of SKUs (stock keeping units), which allows us to play much better on pricing. The number of SKUs was brought down from 12,000 at peak to 6,000 now, with a focus on the most popular products. This has also allowed us to negotiate better margins as we are able to buy larger volumes and offer better prices to our customers. Moreover, while other offline/online retailers provide pricing benefits only on select days, we keep our prices low throughout the year to ensure maximum value for our customers.” Grofers had a rough 2016 during which it laid off 10 percent of its staff and trimmed its operations. However, the company’s financials have taken a turn for the better. In July last year, the company was losing Rs.7.2 crores every month on revenues of Rs.4.8 crores. “Changing our delivery model has helped reduce cost of delivery and monthly loss by 30 percent. We have built up our own systems ground up and the warehouse capacity has been scaled up to 6,00,000 sq.ft. over 22 centres in 10 cities. Armed with our own inventory which helps in better customer service and product pricing, we have built a loyal customer base that has helped us grow 20 percent month on month in the last 2 quarters,” he informed.
Food and grocery accounts for almost 50 percent of the overall retail basket in India, although general merchandise, personal and home products fill up a bulk of retailers’ profit pool. With such large share, other online retailers too are on their toes to keep the business growing. Big Basket’s Hari Menon apprises, “Big Basket is looking at scaling up its business and is already over with expanding geographical areas of operation with focus remaining on making the company stronger in the existing markets. Big Basket is present in 17 tier-II cities and 8 tier-I cities, currently. We offer a very wide range of private labels across categories, which currently contribute to around 35 percent of our business.” Menon feels that the e-grocery market is growing at a phenomenal rate and entry of more players in the segment will definitely speed up the process.
Online grocery retailing is a capital intensive channel because of the need for cold storage. However, despite this challenge, it is here to stay and the retailers are working hard to drive revenue and ensure this channel witnesses growth in the long run. According to Euromonitor International, India will be the primary growth driver of online grocery retailing within Asia Pacific and in spite of local kirana stores having a strong foothold in India, e-grocery retail will prove to be an important distribution channel.
With such prospects of the segment, e-grocery retailers are equipped and have up the ante to trap the most of the available opportunity. “For the times to come, Big Basket’s focus remains to grow in every city we are present in. Secondly, we will make a lot of investments in technology in order to provide customized offerings to our customers. And finally, we are going to deepen our supply chain and focus on what we call as ‘Farmer Connect Program’ that connects us with the host of farmers we have worked with,” said Hari Menon.
The road ahead in this segment would require companies to invest in quality cold storage and a strong delivery system including training and management of delivery staff. Additionally, investing in long term liaisons with farmers directly and launching private labels will reduce operational costs. Dhindsa from Grofers maintained, “We expect monthly sales to touch Rs.80 crores by December. Our inventory model has given us a better handle on product pricing and customer service in order to attract and retain a loyal set of users. Our new range of private labels, coming in next month would help us further drive aggressive pricing across a range of new categories. We also started our labels in the general merchandise category to cater to the growing demand during the festive season. Additionally, with the increasing regional assortment of local products on our platform, our customers will have more to choose from.”