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Portals and retail models abound. But only those that can keep costs low will survive

It is an early Monday morning and Sandhya Ram is busy preparing a presentation. But at the back of her mind are thoughts about her kitchen supplies, and what to cook for dinner. Sandhya needs provisions in a hurry so she turns to a grocery retailing website — it is convenient and the order comes right to her door. “I am a PhD student, and a mother. My husband is a consultant. We have no time to shop, and shopping for groceries outside takes time and energy,” says Sandhya, who is also a teacher and research assistant at a business school in Bangalore. Sandhya and many others like her are just the kind of customers that online grocery retailers plan to tap. At least 20 such businesses have opened up in the past year, and most of them are based in Bangalore. 

But there is many a slip between the cup and the lip. Online grocery retailing has not had a good run in other countries, barring the likes of Tesco and Walmart that have spent years getting their supply chains and technology right. “When it comes to start-ups, the easiest piece to create is the technology involved for a great user interface to attract the customer,” says Devangshu Datta, CEO of retail industry consultancy Third Eyesight. 

There are, however, other challenges in grocery retailing — sourcing, maintaining consistency in service and products, and keeping operational expenses in control. But there are  bigger problems. 

One, the business needs money to survive in the long run. The scale that many of these businesses have is limited to the top 10 major cities and their affluent populations. Two, a majority of Indian consumers is yet to experience shopping online. Of the 8-10 million Indian women working in the formal sector (according to the National Institute of Public Cooperation), it would be difficult to assume how many of them actually shop online. But the online grocery business’s survival will ultimately depend upon women as decision-makers. 

This business may be easy to enter, but longevity is another ball game, and the entrants are still learning the rules.  

The Right Direction?

After taking orders online the previous day, the five-member call centre of Towness.com dispatches the packing order to the delivery team. The next day, 20 trucks leave a 20,000-sq. ft warehouse in Peenya, Bangalore, with cartons of jams, lentils, rice, wheat and pickles from FMCG brands, including ‘Town Essentials’. “I have been running a B2B business for 10 years and that gave me enough experience to dabble in the B2C business with private labels,” says Amar Krishnamurthy, MD of Town Essentials. Thanks to private labels in lentils, jams and pickles, the B2C business gives him higher margins and he also has more control over the working capital cycle. Usually, say analysts, margins in the online retailing business are only as high as 8 per cent, and that too if one manages the supply chain efficiently. But if private labels are the main business, margins can be significantly higher.
 

“There is enough business within Bangalore and I am improving my website experience to get more orders,” says a confident Krishnamurthy, adding that his B2B business, which supplies to over 200 hotels and restaurants, funds the online arm and manages its delivery too. Towness.com gets about 45 orders a day. “I do my own sourcing of all the commodities, fruits and vegetables because I believe in maintaining consistent quality if the customer has to come back to shop at the website,” he says. 

In another part of Bangalore, 20 Omni vans leave a mandi in Whitefield for a 6,000 sq. ft warehouse, from where Bigbasket.com takes its products to three hubs across the city and delivers groceries. “The ability to gauge demand is the key to success in this business as you do not want to end up with too much inventory,” says Hari Menon, who co-founded Bigbasket.com with Vipul Shah. Menon adds that every online grocery retailer has to operate multiple spokes supported by a large hub if this business has to succeed. Bigbasket.com has 20 trucks and claims to handle over 400 orders a day. To support large orders, it is moving to a 30,000 sq. ft warehouse that will also be its central hub. “In this business you have to meet a 100 per cent fill rate for the customer. If you do not have the product he or she likes, you have lost one customer,” says Menon. The company has raised $10 million from Ascent Capital, and is currently the only business in this segment to have external funding.

 

WHY ONLINE GROCERY RETAIL BURNS CASH

Lack of consistency in quality and fill rates Delivery and inventory costs Low repeat customer rates Touch and feel nature of Indian shoppers The supply chain in India is built to help kirana stores Order value is very low Brands and distributors will not give long-term credit Warehousing needs skill, technology is just a tool Organised retail far from saturated

Bangalore is where most of the action is but Chennai, Hyderabad, Mumbai and Delhi, too, have a few online retail groceries. Take Aaramshop.com in Delhi, started by ex-advertising entrepreneur Vijay Singh, who is pursuing a different model. Singh plans to integrate kiranas across the country on a common technology platform and provide a local twist to supplying groceries. “Records show that India has 12 million kiranas and only 20 per cent are technology savvy. Imagine the opportunity it presents to help these small businesses have an online format,” says Singh, founder and CEO of Aaramshop.com. His company has tied up with over 2,900 kiranas across 28 cities. “This solves my inventory and delivery problem.” 

Interestingly, Singh provides the software for free to the kiranas, and the monetisation lies in the data collected about the brands sold, which he hopes to sell to FMCG companies (which could then use it to realign distribution outfits). Singh also hopes to help brands with creatives in the long run. 

Going further afield, Aaramshop.com has tied up with some stores of Reliance Fresh, KB’s Fair Price Shop and government-run outlets by integrating their kirana models. The company plans to reach 22,000-odd retailers soon. Singh has also tied up with Marico’s Saffola — when someone orders oil on Marico’s website, she is led to the Aaramshop.com platform. “We have built our company on the cloud,” adds Singh. 

Another example of an online grocery store with some scale is Mygrahak.com in Delhi, founded by Ambuj Jhunjhunwala, who already had a food and grocery chain. “There is a gap between the large department store and the kirana, which online retailing fulfils,” says Jhunjhunwala. According to him, the winning formula is to deliver economically. “You need multiple warehouses, a large range of products, and promise timely delivery.” He experimented for six months to get the delivery model right and now has a 22,000-sq. ft centralised warehouse and 25 delivery vans to cover Delhi. “We source pulses directly from mills and keep the quality consistent for our customers,” says Jhunjhunwala, adding that Mygrahak.com gets more than 50 orders a day. 

It is not just newcomers who are taking to the medium. For instance, Ram Narain Prem Narain, whose wholesale and retail store is based in Delhi’s Khari Baoli area, has created its own online portal called Dilligrocery.com. “We have been in this business for 28 years, and understand sourcing of products and selling in our own brand name. The e-commerce portal was a natural extension,” says Ashok Gupta, CEO of Dilligrocery.com. While its own products bring in margins, the wholesale business, which supplies to hotels and restaurants, is the backbone. “The major cost for us would be managing the website. But one of our current tasks is to increase conversions through the portal,” says Gupta.

Back in Bangalore, the founders of Zopnow.com are trying to get the model right by focusing on South Bangalore. Mukesh Singh and Bal Krishn Birla, both of who are from IIT-Kanpur, and have worked for e-commerce portals such as Amazon, AskLaila, MakeMyTrip and others, realised the need for online groceries after having waited in long queues at retail stores during weekends. 

“Bangalore has so many apartment complexes that can be targeted because they do not have access to kirana stores and good department stores,” says Mukesh. Their focus is to get the customer back four times a month with a minimum order size of about Rs 1,200 per delivery. “The volume is the key in this business to make good expenses and earn profits,” says Mukesh, adding that the trick is to figure out which SKUs sell more. They find that about 300 SKUs sell consistently, while the others are bonuses and bring in the margins. Zopnow.com is also building a loyalty programme.
 

Then there are those who plan to make money by leasing software to others, like Redbus.in, a technology provider that leases its software and makes 10 per cent for every seat sold by the operator. But be sure to expect less than 10 per cent in the online grocery business. 

Says Phaneendra Maseedu, founder of Greenytails.com in Bangalore, “The technology will help kiranas plan their sales and billing better and reduce inventory. We will charge a percentage of the sale and maintain the software.” Maseedu says that since his expertise was in technology and not in sourcing and delivering groceries, this was the best model for him.

Vinit Saraogi, too, is working on an aggregator model, but with a difference. The IIM-B student, who ran a textile business for a decade, says, “Our company wants to bring all kiranas under a common brand name and platform called Kiranawalla.com. This way they will have more bargaining power with brands,” says Saraogi, the portal’s co-founder. He plans to scale up to 4,000 kiranas under a year. In this model, the kirana will take the delivery and inventory risk, and Kiranawalla.com will charge 2 per cent of the sales made from the store.
 

Tough Order

There may be many players in the online groceries business now, but all won’t last the course. “This is no easy business,” says Sivaguru Subramanian, CEO of Chennaionlinegrocery.com. Subramanian, who started his business five years ago, says it is still burning cash. “An online grocery retailing business can be started with as little as Rs 1 lakh. But I have invested Rs 10 lakh so far.” Subramanian runs a small-scale software company in Sydney; he is here “because the future is in online retailing”. “The entry barriers are very low. Buying groceries online has just begun. To survive, one needs to meet the local tastes with quality products.”

Sushant Junnarkar has bigger ambitions — he plans to be in 18 cities in two years with Atmydoorsteps.com. But before that, he is still perfecting his model to achieve scale in South Bangalore. “Orders and procurement need to be centralised and the inventory cost should be minimum,” says Junnarkar, an IIM-B alumnus who worked in a MNC bank before turning to entrepreneurship. 

As in a marathon, there are many at the starting line but only a few make it to the finish. Many of these online grocery portals will not last because most of them are strong on technology but not on something more essential — sourcing and supply chain. The winner would have to understand the inventory and logistics business, and have funds to make the right noises about the portal. “Volume is the key; it is the only way to recover upfront costs, provided the business has been able to keep its back-end costs minimum which, at the moment, is unlikely,” says Pinakiranjan Mishra, partner and national leader at Ernst & Young. 

But the irony is the extent of interest in the grocery business regardless of the travails. But will technology and enthusiasm alone be enough to overcome formidable problems such as customer mindset, fuel prices and untrained manpower? The answer lies in persistence. 

AMBUJ JHUNJHUNWALA, Portal: MYGRAHAK.COM, Orders/day: 100, Avg. value/order: Rs 900, Model: Inventory; sources from wholesale markets
Jhunjhunwala has sector experience. Has a large warehouse and 25 delivery vans to cover Delhi and get delivery economics right

 AMAR KRISHNAMURTHY, Portal: TOWNESS.COM, Orders/day: 45-50, Avg. value/order: Rs 1,000, Model: Inventory; sources from APMC yards and mills
B2B business funds the online arm. Private labels improve margins. Focus is on covering Bangalore, and consistent quality

VIPUL SHAH, Portal: BIGBASKET.COM, Orders/day: 150-400, Average value/order: Rs 1,200, Model: Inventory; gauge demand correctly
Focus is on 100 per cent fill rate, and an efficient hub and spoke model of sourcing and delivery. Has raised $10 million from Ascent Capital

(Vishal Krishna This story was published in Businessworld Issue Dated 08-10-2012)