Is it a good idea to start online grocery business in India?
For those who are interested in an Online Grocery Startup and wants to evaluate its feasibility and future prospects
Is Online Grocery Business Lucrative or What is the future of Online Grocery Startups in India?
Online grocery market refers to a relatively new market; idea has already been incorporated in west where grocery orders can be made on web or mobile application. Online grocery offers massive scope, as India is a $520 million retail industry with 60% ($350 million) of which is only grocery’s share. India is the sixth largest grocery market with a 19% growth year on year of e- grocery market. There are many online grocery companies competing with each other for the leadership, most prominent being Big Basket, Zop Now, Aaram Shop, Nature’s Basket, Grofers, PepperTap and Mera Grocer. These companies are trying to change the consumer behaviour for purchasing their grocery items online. Almost all of them are at most 3 – 4 years old and have grown leaps and bounds in many cities and receiving fascinating number’s backing in terms of funding.
Online grocery business is indeed a lucrative business as all above companies have been able to bag huge investor’s money and thereby expanding rapidly.Big Basket, the oldest of all, started in 2011 and has roped in $85.8 million so far. Having presence in 7 cities, Big Basket is planning to target tier-2 cities also. Pepper Tap (incorporated in 2014), the youngest of above-mentioned companies has also received $51.2 million equity funding so far. Grofers (incorporated in 2013) with $165 million funding has a presence in 9 cities. Startup world s so exciting like a roller coaster ride,when it becomes almost clear that someone is winning the race by bagging huge amount from investors, very soon you receives the news of its competitors getting even more funding and closer to the finish mark.After Groffers raised $120 million from Softbank, BigBasket is getting even bigger as it is close to raising $120 million from Sands Capital and others, thereby winning the valuation race as well.
Thus, online grocery industry is catching the eyeballs of not just investors but also the entrepreneurs. Established players like Amazon, Flipkart and Google have also entered the industry.
Are these startups filling any gap?
Of course yes! Metro city’s lifestyle is no more the same, as it was 10 years before. Although following terms- High disposable income (7th highest in world), Double Income No Kid, Highly pensioned old age people are quiet old but the level of penetration and acceptance in our society has increased manifold. The stressful, long stretched office hours followed by heavy metro traffics leaves no flesh and blood to shop household essentials. People are exploiting all opportunities to save their valuable time and energy from tiring household works. Such people with high disposable income and self-pampering attitude are important for online grocery companies, as these are the potential customers. Having a platform where one can place orders for daily or weekly household needs and get it delivered at the doorstep is a good value proposition.
Starting an online grocery business could be a good idea if the customers are willing to pay a price for this service. That becomes one of the major challenge in starting an online grocery business in India. If there is a question of additional convenience fees then the customers instantly starts evaluating the pros and cons of an online grocery structure:
- A person may not want to get disturbed with the honking bell ruining their peace of mind after stressful office hours.
- Minimum order quantity/ price- Just to avail this service people have to add an item or two which they might not need in near future, just to make up to the minimum order quantity.
- Still you may not get all items (etc. milk, medicine, other items apart from grocery) at home- Even though you may have to pain yourself to get those two other things, which your grocery store or delivery app doesn’t deliver.
- Your presence at home is required- It becomes highly difficult to co-ordinate with your spouse/ family the timings of arrival of your items delivery most importantly if you have to plan it in a day advance like Big Basket.
- With all these concerns you are supposed to pay extra fees to get your stuff at home.
So, for now online grocery companies are charging very less amount from the customers due to high competition. Online grocery companies are offering free delivery on minimum purchase as low as Rs.150. The highest being of BigBasket-minimum purchase being Rs.1000, but the delivery charges are minimal (Rs.20/-).
SWOT Analysis of Online Grocery Business:
- Delivering convenience (saving from traffic jams, parking hassles, queuing up, time) hence attractive to the customer
- Low Fixed Cost if coordinating with local stores
- Venture Capitalists, Angel Investors betting on multiple companies in same industry to vouch for higher return
- High Variable cost (each delivery average cost is Rs 30-40)
- High Cost of Operation (costly feet-on-street, inventory cost, cold storage for perishables, transportation, wastage during transportation)
- Quality assurance issues
- Limited range of products- limited number of brands available of a particular product
- Out of stock issues
- Unripened fruits- Stores tend to keep unripened fruits and veggie to increase the shelf lives
- Even 1 thing required by a customer is not available defeats the very purpose of the online store, as the person has to walk down to the local market to get the same.
- Less Impulse Buying means less spending by customer
- Profitable only with large scale
- Once people get accustomed to shopping grocery online, online grocery space will get consolidated with few players which will charge premium for their services
- Segmenting and targeting the most profitable customers
- Value package- Cross selling through packaging profitable and non profitable items in a way to compensate loss from less profitable items
- Easy to sort items- through automation or manual enabling customers to decrease order time
- Fund raising at appropriate time for gaining customers and sustaining high operational cost involved in the business
- High competition- Due to availability of initial funding in this segment there are many startups that are targeting the same set of customers by giving steep discounts. This practice will affect the profitability of the companies in the near term.
- Retaining customers is also a big threat.
It is imperative for an individual who is aspiring to start this business to evaluate the weakness and threats in this industry
Porter’s Five Forces
Competitive Rivalry (HIGH)
Much has been discussed above regarding existing competition in this area. Not just small new players popping up each day in this business, big companies have also thrown their hat in the ring too like Amazon Fresh, Flipkart, Google shopping express, etc.
Customer Power (HIGH)
In this business customer is the King. Very few companies are charging delivery charges on amount less than 500 (except Big Basket with minimum order 1000). All companies are trying to give best value and shopping experience to the customer without charging them. As of now all the companies are focusing on growth and gaining new customers. I believe in future also customers will have good number of options to choose from online grocers.
Supplier Power (LOW)
Supplier on the other hand is at lower hand as online grocery companies have huge choice, procure in bulk, giving suppliers extra business by taking them online. Vendors can increase their sales by simply partnering with the online grocers.
Threat of New Entrants (MEDIUM)
it is becoming a highly magnetic industry. So many success stories and huge market potential is attracting lot of companies to try their hand in this segment. Investors are also very bullish in the hyper local segment and betting big bucks for their future returns. However, initial capital requirement, low margins and high competition is a deterrent to entry.
Threat of substitution (MEDIUM TO HIGH)
The only substitution being offline stores and their delivery system. Customer can easily change to offline and other online grocery, as there is no cost of change and no brand loyalty.
After analysing the Online Grocery Delivery Business in India we can conclude that it is a lucrative industry to enter. If you are an enthusiastic entrepreneur with an innovative business model and good operational handling skills you can surely test the waters.
Few things to keep in mind if entering online grocery business in India
- Must have sufficient capital to kick start and even bootstrap. We are reading many success stories in this segment, success blows its own trumpet but no one talks about the failure.
- This place is already crowded. You must enter with an innovative model.
- Evaluate your Points of Difference and Unique Selling Proposition, which makes you stand out.
- Getting investment is a crucial factor (learn how to top the investor’s list of favourite startups- What Investors Look For in a Business Before Investing) in this industry because of high operational cost and negligible margins. Investors generally bet on a strong team. Thus, make sure you have a complementary team with different skills.