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Covid 19 – How a Black Swan analysis event became a lifetime opportunity for E-Grocery Market Share?

Covid 19 – How a Black Swan analysis event became a lifetime opportunity for E-Grocery Market Share?

Published on 06 August 2021 .Views 17 .Comments 0
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Did you notice the number of e-grocery apps or e grocery market share making their way to our mobile phones – Amazon pantry, Big Basket, Grofers, JioMart, DMart Ready, Spencer’s, and many more? With the arrival of the Covid-19 pandemic, there is an increasing need for home delivery of essentials, and this has caused a great disruption in the e-Grocery Space. Let’s talk about these e-Grocers in today’s article!

The e-Grocery platforms of e grocery industry (like e grocery companies or e grocery stocks of BigBasket, Grofers, etc.) have seen an enormous opportunity for e grocery market share India over the past 5-6 years of e grocery business model. However, COVID proved to be a catalyst for the e grocery covid space making it witness a once-in-a-lifetime turn of events that provided an impetus to the overall sector. With the COVID-induced lockdown, delivery to home has become the preferred mode of buying. Moreover, the recent entry of JioMart (that has a readymade base of internet users) has made the e-Grocery market more competitive & exciting than ever before.

The overall Food and Grocery (F&G) market size in India is between $580-600 Bn as per 2020 data.  The e Grocery India market has grown 30 times in the last 7 years to reach $3 Bn Gross Merchandise Value in 2020. The market just got doubled from 2019 (1.5 to $3Bn). Despite the exponential e-grocery growth, e-grocery India only accounts for 0.5% of the full grocery spend in India. This is less than compared to developed countries like China, UK, and the US, where this number is in the mid-single digits.

Modern Retail v/s E-commerce scale

The first level of disruption in the traditional e Grocery market share in India was led by the Modern Retail segment. Despite its evolution and rise in the last 20 years, it has stagnated to 5% of total Grocery sales in the country. Comparing this to the global counterparts, the same in the UK, the US and China stand at around 94%, 92%, and 57% of the total Food & e Grocery market in India. The reason behind this laggard nature is that Indian Modern Retail has primarily grown in metro and Tier I towns & cities, due to multiple challenges like higher operating cost, lack of skilled manpower, lower gross margin, and regional/local limitation.

COVID-19 helped Online Grocery sales

The pandemic did to e-grocers what demonetization did for online payment platforms back in 2016. During the peak of COVID-19 in Q2-CY20, panic-led inventory stocking by first-time customers drove AOVs (average order value). The market reached 1.6x of Jan’20 GMV in Jun’20 and ended CY20 with 2x Jan’20 GMV, largely maintaining the order surge witnessed during the initial lockdown. During this time, Big Basket & Grofers (2 of the largest e-grocery players) witnessed 4X & 3X daily orders of pre-COVID times. AOV also saw a 15% & 25% respective jump to INR1,500 & INR1,820 respectively.

A slew of new players entered the e-Grocery space during the COVID-led lockdown period in CY20. For example, Swiggy, Zomato and Dunzo transitioned into e-Grocery and JioMart also launched its e-Grocery business platform in May’20. Amazon Pantry further expanded to over 280 towns and cities in Jun’20. This widened the reach of e-Grocery players which registered exponential growth in comfort, health, food, and hygiene products due to the shift in shopping preferences towards a healthy lifestyle.

Buyers: Value v/s Convenience

E-Grocery family households can be classified as a) value first and b) convenience first buyers. Value first shoppers are conscious about the pricing, discounts, and especially return/exchange policies of the platform, while convenience first households aspire a broad product basket in one place, lesser waiting time, and product quality & assortments. In India and as expected, 65% of the e-Grocery addressable market is made up by value first. These value first buyers have lower/just sustainable incomes and hence cannot give priority to product assortments and faster access. Hence, they prefer best-priced products under discount, bank/wallet led promo cashback offers, even if the variety is limited or the user experience is not very fluid.

Different Players in the Online Grocery space

Multiple tech-enabled platforms are disrupting this emerging sector with innovative business models. There are e-Grocery specialized platforms that have created a niche in the early morning (6 am – 10 am) deliveries or a specific range of differentiated product categories like meat/chicken or hyperlocal (connecting consumers to local Grocery stores) delivery, along with marketplace players (Flipkart & Amazon) who have launched Food & grocery as an additional category on their existing e-commerce platforms.

  • Market Place: To tap the exciting e-grocery opportunity, established e-commerce Market Place players like Flipkart & Amazon have entered into e­-Grocery. Amazon is using both inventory-led and the hyperlocal model to serve the grocery category through three channels: a) Amazon Pantry, b) Amazon Fresh, and c) Amazon Now. Flipkart operates through two channels: a) Flipkart Supermart and b) Flipkart Quick. It uses the inventory model for the Supermart platform and the hyperlocal model for Quick.

  • Specialists: These players are specific to the e-Grocery segment and have strong consumer recall.

  • Verticals: Incumbent players like Big Basket and Grofers and focussed on the inventory-led model.

  • Hyperlocals: Newer players like Dunzo and Swiggy are leveraging the hyperlocal model (from their previous businesses) given its lower CAPEX requirement.

  • Micro Verticals: Niche players operate here and specific product categories. Example: Supr Daily, Milkbasket and BB daily cater to dairy products and select other products in some regions and Licious in meat-based products.

  • Offline players move to omnichannel: Offline competitors like Reliance Retail (RRVL), Avenue Supermart (DMart), Spencer’s Retail, and Star Bazaar are entering this segment. Reliance Retail launched JioMart - its online platform and DMart entered with DMart Ready stores in select cities & towns.

In the last 3-4 years, each model has played its part in addressing specific niches. For example, specialists have expanded to more cities, marketplaces have ramped up their grocery product portfolio due to their existing reach, and micro delivery players also addressed a specific market requirement of dailies. These online players have grown tremendously over these years and are now a major force to reckon with in the F&G industry. With this stupendous rise, the e-market (including Big Basket, Grofers, Amazon, Flipkart, and JioMart) are now third in the Organized Retail after DMart and Reliance Retail.

Challenges: Online Grocery retailing

Thin margins of the e-grocery business, perishable inventory, along a higher number of SKUs make it unviable to manage daily operations. Further, the need to fulfill the quick delivery requirements, diverse food consumption habits, and preferences across different regions/states in India, increases the supply chain woes.

  • Food Delivery v/s e-Grocery: In the food delivery business margins as well as Average Order Values (AOV) are high whereas product size is smaller & compact, which attributes to lower logistics costs. E-grocery players, on the other hand, are met with razor-thin margins and higher logistics costs owing to smaller AOV and bulky order quantity (compared to similar prices in food delivery). Additionally, food delivery does not have an option of returns, thus saving costs related to reverse pick up, which is ~10% of the order value. The end customer in food delivery is convenience first whereas at e-grocery its value first.

  • Logistic cost – a major headache for e-grocers: Delivery problems/failure, product returns, and COD (cash on delivery) increases the overall cost. As per a report, total logistics costs could reach 40% of order value, including other peripheral costs such as warehousing, freight forwarding, and other value-added logistics. Thus, the operating model becomes difficult and unviable for the e-grocers as the margins are wafer-thin. Returns and COD also increase the price settlement period, elongates the cash conversion process, among other issues.

Private labels – the next focus area of online players

E-grocery players are venturing into the private labels segment in a move to capture the entire value chain, which is in accordance with the strategy followed by traditional offline retailers. This should ultimately act as the next big revenue & profit driver. As per reports, 50% of recurring purchases on e-Grocery applications could be attributed to private label sales. The revenue share of private labels has also increased from 32% to 40% in CY20 vs CY16 and is poised to attain a share of 45% by 2022.

Some of the benefits of private label to e-grocery players are:

  • Controlling the supply chain: Gives them the leverage to own the full spectrum of value chain from sourcing, manufacturing, and distribution of products to customers, thus improvising inventory management.

  • Aiming for the untapped market: By using the data insights from their online platform, e-grocers develop products with high craze & demand for the unexplored market segment. Despite facing strong competition with the established brands, e-Grocery players capture market share by introducing special products based on price, taste, nutritional value etc., while also maintaining the quality of the product.

  • Customer stickiness: The unique brand positioning helps in repeat orders thus leading to customer stickiness. This ensures a sustainable growth.

  • Better margin: Private labels offer twice the margins over traditional branded products.  This allows e-grocers better profitability as it removes intermediary margins in the value chain.

We hope you liked the article and now you must be feeling more confident about your understanding of this segment. Our objective of sharing this article with you is to help you in the analysis of businesses in the e-grocery space. Sharing is caring, so please do share with your family and friends and help them in increasing their knowledge as well!

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