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Online grocery delivery: Fundamentally flawed?

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After almost a year-long funding frenzy that lasted until the end of 2015, the online food retail space, especially grocery delivery, doesn’t seem to be heading for a revival any time soon.

Online grocery delivery: Fundamentally flawed?
The online food retail space, especially grocery delivery, doesn't seem to be heading for a revival any time soon

Under the grocery delivery format, two distinct e-grocery delivery models – hyperlocal and marketplace delivery – exist. Where marketplace models such as BigBasket, UrDoorstep, among others, maintain own inventories, hyperlocals such as , Grofers, Zopnow, revolve around marrying the unique advantages of neighbourhood mom-and-pop stores with a technology-driven delivery model.

Of these two, hyperlocal was one of the hottest buzzwords in the Indian startup space during 2015, with several startups and e-commerce majors like , even launching separate verticals for hyperlocal grocery delivery. However, hefty investments on customer acquisition, cash-back schemes and fundamentally rocky business plans made this model a tough nut to crack. Experts now indicate that the faulty business model will eventually perish.

On April 25, Gurgaon-based hyperlocal delivery start-up PepperTap, which has been in business for less than two years, announced its intention to stop operations across the country by May this year following continued losses and a weak cash flow. Peppertap was present in 18 cities before shutting down operations in 10 locations in February this year. The company had raised over $51 million in risk capital from blue chip investors including , , and e-commerce major Snapdeal.

“We were not really worried about the competition. But we did not have the confidence of being able to raise big rounds of funding. At the same time, we were in the negative gross margin business and we would have required more funds to continue with operations. It was a tough call for us and we had to take it,” CEO of PepperTap, Navneet Singh, has been quoted as saying.

This follows last month’s closure of on-demand grocery delivery service ‘Nearby’ by e-commerce major Flipkart, who started it a mere five months ago as an experiment in Bengaluru. In January this year, PepperTap’s peer Grofers too rolled back operations in nine cities. The development comes barely a month after the venture closed a mammoth $120 million (Rs 800 crore) round of funding led by SoftBank. The company is now operational in a total of 17 cities.

Taxi-hailing firm Ola, which also tried its hand at the online grocery delivery business last year in three territories — Bengaluru, Hyderabad, and Delhi-NCR — recently announced that its Ola Store and Ola Cafe verticals will no longer be available to customers from March this year.

Kirana stores buy products on the low margins from brands and the manufacturers and get only of 9-10% for themselves. Besides that, they have the lowest assortment due to lack of space, which is again a disadvantage from the customer’s point of view. And if you are tying up with the weakest link you have anyway weakened yourself.”

— Dinesh Malpani, Founder and CEO,Urdoorstep.com

“Most startups that entered the food tech space are kids and novices who don’t understand the business. They understand the technology and even technology to the extent of creating an app, which can be replicable by anybody and everybody. So they fundamentally had no understanding of the business,” explains Founder and CEO Urdoorstep.com (a Bengaluru-based online hypermarket), Dinesh Malpani, who, after years of experience in retail (including at , and ’ hypermarket format Total) , launched his venture in October 2015.

“The (grocery startups) gathered insane levels of initial funding, which they started throwing left, right and centre without building a business. And that is why these businesses are shutting down now,” he states.

Any business in any form — physical or digital — runs on gross margins and operating costs, Malpani points out. “Hyperlocals who have shut down or rolled back operations were sourcing products from kiranas, the weakest link in the entire supply chain. Kirana stores buy products on the low margins from brands and the manufacturers and get only of 9-10 per cent for themselves. Besides that, they have the lowest assortment due to lack of space, which is again a disadvantage from the customer’s point of view. And if you are tying up with the weakest link, you have any way weakened yourself,” he notes.

In addition to the sourcing weaknesses, most food tech operators offer 20-30 per cent discounts on every single transaction in order to acquire customers. “So, even if you are getting a Rs 1,000 crore funding, you will spend all of that in a span of one month on 20 per cent discounting. Where’s the money to invest in logistics, acquisitions, retention or building a back-end process?” Malpani asks.

“It is absolutely ridiculous for both entrepreneurs and investors to run or invest in a business model like this. What is surprising is that it took so much time and cash burn to realise this,” he asserts.

 

Now consider BigBasket, which unlike Grofers and PepperTap, had a stronghold on the online grocery segment with an inventory-led model that guarantees control over customer experience. Launched in 2011, the company operates in 18 cities and has projected revenues of an astonishing Rs 6,000 crore by 2018. The company’s turnover last year (Jan-Dec 2015) was Rs 506 crore.

“Grocery customers have typical buying habits and favourite retail stores which are highly developed over a long period of time. While they do try competitive stores, they are willing to switch only if the format fulfills three conditions — completeness and availability of assortment, quality of fresh produce, and timely and error free delivery. Offline supply chains are not fully developed and hence relying on them does not deliver a great customer experience. This has led to the shutdown of models based on them,” says National Head – Buying and Merchandising BigBasket, .

“BigBasket has been growing three fold year-on-year in the existing cities. We have also opened in 15 new cities over the past six months. Based on this, we are projecting Rs 6,000 crore turnover in 2018,” Kumar adds.

The company has also recently raised $150 million in fresh funds led by private equity (PE) firm The , venture capital firm Llc and International Finance Corp. (IFC), the private sector lending arm of the World Bank.

So, is 2016 going to be about the end of the hyperlocal?

The future will be about investors understanding business in minute detail and using technology to be able to disrupt the market effectively, Malpani says.

“It is important to earn customer loyalty by providing terrific experiences and differentiation. You need to know the farmers, what is happening in the crop season, what is happening in the drought situation, which mandis have which type of yields every week. And then, you have to source smart and offer the best to customers. This is the real backbone of the business. Technology is definitely important, but it is not the only tool to run this,” he elaborates.

“Having said that, I believe that any business which works on providing customer loyalty and runs on these fundamentals of profitability, scalability and differentiation will surely survive in the long run. The rest will perish.”