In the past couple of years it could be observed that consumer behavioral (buying) pattern has undergone a paradigm shift especially in metro and medium sized cities. This behavioral change can certainly be attributed to the advent of various online portal in retail space, the rise in internet users to 213 million and growing popularity of shopping online.

These current portals /web stores have successfully accounted a decent share in digital electronics, apparels consumer market. They have also invoked measures to diversify and wedge a niche in grocery market by capitalizing on problems that consumers face due to city’s fast pace, tedious commuting and hectic lives. The key reason for customer going online is to avoid the hassle of going to the store and avail some discounts if applicable. Eg-Flipkart and Snap deal have added gourmet and specialty food to their offering.

According to recent estimates India’s retail market (currently $500 billion and 6th largest in the world) would touch $725 billion by 2017 wherein the share of online grocery market would be 2%.The online grocery market is growing at a sharp rate of 25-30% in metros and other large cities. The

But the big question is ‘Will it be able to increase or sustain the current rate?’ or ‘Will the new companies pouring in be able to achieve a break-even rate early?’,,, etc. are some prominent first mover online stores retailing groceries in some cities of the country.

Though at the surface level the future prospects seem very tangible and achievable but there are various challenges and roadblocks that this Industry is prone to face.

The Challenges:

  • Unlike Electronics and fashion retail where online companies have substantial margins and can give discounts and waivers, online grocery companies have very low margins (6-15%). Pretty low to maintain the other costs!
  • The average order value (AOV) is low thus diminishing the profits and quite demotivating.
  • These companies are subject to logistical problems as the cost of delivery is high. Also delivery is expected to be same day or next day, considering the freshness of the commodities.
  • Since there are wafer thin margins, warehouses which has expensive SKUs (Stock Keeping Units) defeats the entire purpose of economies of scale.
  • Technology costs, customer acquisition costs and marketing costs are very high and are bagger by low customer loyalty since the customer might switch to some other portal whenever he feels he feels he is at an advantage. The other portal might be selling at a lower price due to excess stock or some other reason.
  • One of the biggest challenge is the Industry dynamics existence where small kiranas give credit to their regular customers. Also some kiranas have now started giving free home delivery services to sustain their customers.
  • Another major problem that this industry faces to Indian consumers is the touch and feel mentality for vegies-grains.
  • When perishables like fruits, vegetable or meats are added to the equation the supply chain costs and risks increases exponentially.

One of the key issues with online grocery is that it is a local, city specific operation. Every time one adds a new city, it is akin to launching the business afresh. This makes grocery difficult to go national and more challenging in terms of operations.

Well Challenges is the very essence of any business and in up till now it seems dominating but there are certain determinant factors on which the online grocery companies can capitalize on.

  • Grocery is a high purchase category; one needs groceries every week or every month. Hence getting a repeat customer is easy. Thus one can justify the customer acquisition cost with respect to life time value of the customer.
  • With the lives of people becoming hectic and increasing penetration of internet connectivity there is obviously a significant customer base that companies can target on.
  • Payment gateway is a non-necessary thing in this business generally as COD is preferable. Thus their charges is saved.
  • In Indian context mostly delivery is done by the delivery-man employed by the company hence escaping the logistics tie-up and saving substantial amount.
  • Online grocery companies have the edge due to diverse range of products which kiranas cannot offer due to small SKUs.
  • With the ‘My List’ option available online, customers can buy the whole month’s good within few seconds thus bringing in customer loyalty.

There are various business models which have been tried and tested in India. Some online merchants have tie-ups with kiranas, FMCG Companies while some manage all the inventory on their own. In India On-demand model which is a hybrid of network with kiranas, FMCGs and self-managed inventories has worked out best keeping the profits and customer loyalty high.

Sure it has been a humble beginning for India in this field and it will take time to move beyond metro and reach vast segment with high purchasing power. But rapid IT development, analysis of consumer psychology and through strategic adaptations online grocery can be expected to have a bright future in India.

Sanat Kumar Sahu

Sanat is a student at SSCBS, DU. The views expressed are his own based upon the analysis and research he did on the topic from various books, reports and web articles.  He regularly writes for Corporate Monks as a research associate. The writer takes person responsibility for the ownership of the content shared and incase some sources have not been given credit, you can directly mail him