Business Today

Wafer-thin margins

twitter-logo Taslima Khan        Print Edition: May 13, 2012

More than half a dozen start-ups have launched online grocery stores in recent months. Working people, happy to have rice, sugar and even organic pepper delivered to their doorstep, may wonder why no one thought of it sooner. But egroceries are a tricky business. The success of online book and gadget retailers is little reason to assume that this sudden smorgasbord will fare well.

There is, of course, room for growth. According to consultancy firm Technopak Advisors, food and groceries account for $343 billion (Rs 15.44 trillion; one trillion equals 100,000 crore), or 68 per cent, of the $505-billion Indian retail market. Within this category, the organised food and grocery market, estimated at $12 billion, is expected to grow at a compound annual rate of 30 per cent in the next five years.

That might explain why 26-year-old Ambuj Jhunjhunwala, who started online supermarket MyGrahak in 2010, wears a confident smile. The entrepreneur, whose family promotes 6Ten, a 300-store retail chain, is unfazed that he has three rivals in the National Capital Region alone (see Grocers Galore, page 72). "The market has room for everyone," says Ajay Mittal, Director, Ascent Capital. His company recently invested $10 million in BigBasket, the only egrocery venture to attract funding.

"If people can buy highly touch-andfeel products like shoes or apparel online, why not grocery," asks Vaibhav Goel, founder of three-month-old FamilyKart, which delivers around 20 orders a day in and around Delhi. E-grocers enjoy some advantages over regular supermarkets. They save on costs such as rent, store staff, and managing store inventory in addition to warehouse inventory. Two years ago, 6Ten closed 25 stores that were not doing well. More recently, Future Group's Big Bazaar and the More chain, operated by Aditya Birla Retail, also shut several stores that had turned unviable. "Delivery costs account for 60 per cent of what we would incur on rentals, so we save 40 per cent," says Hari Menon, co-founder of Bangalore-based BigBasket.

One reason why no e-grocery startup other than BigBasket has managed to raise money is that margins are wafer-thin. "At a gross margin of 12 to 15 per cent, profitability cannot be more than two per cent," says Gaurav Saraf, Director of Epiphany Ventures, a venture capital firm. The gross margin on fast-moving consumer goods is as low as 14 per cent. On fruit and vegetables, it is around 16 per cent but shelf life is shorter. This is why many sites, including MyGrahak and FamilyKart, stay away from fresh produce. BigBasket, however, says it has no problem. "Fruit and vegetables are procured only on order, except for those with a longer shelf life, such as potatoes and onions," says Menon. "This reduces loss of stock by three to four per cent."

One of the biggest rivals of e-grocers is the local kirana store, which offers home delivery in many cities, often within an hour. But Ascent Capital's Mittal says kirana shops lack the cost advantages to offer customers the best price, and cannot stock a wide range of products. BigBasket tries to consolidate orders in a locality and reach the customer in eight to 24 hours. But is that enough? Manohar Mason, Managing Director of Pentagon Communications, a marketing and consulting firm, doesn't think so. He says: "People can wait for books, but not groceries."

E-grocers are more likely to get repeat purchases than online retailers of other products. BigBasket says 65 per cent of its 3,000 customers are repeat buyers. But this also means egrocers must be on their toes. "If you can satisfy a busy customer, you're in for a huge opportunity," says Mason. Many investors doubt whether e-grocers can scale up. "This category cannot rely on a hub-and-spoke model, unlike apparel or electronics," says Mukul Singhal, Vice President of SAIF Partners, a venture capital firm. A book or an iPod can be sent by air across the country more easily than a 10 kg package of groceries.

"To reach Rs 100 crore in revenue, you must be present across the country," says Epiphany Ventures's Saraf. "Supply chain challenges are different in Bangalore and Gurgaon. You cannot replicate your model." So, while Jhunjhunwala expects MyGrahak to turn profitable by end-2012, he has no expansion plans.

 TRICKY BUSINESS
  • Margins as low as 2%
  • Supply chain hard to replicate
  • Many items are perishable
  • Scaling up is diffi cult
  • Competition from big retail
Goel of FamilyKart says scaling up in other cities makes sense only after it has fully penetrated the area it currently operates in. But it is debatable whether volumes alone can make a venture profitable. Started in 2007, Britain's biggest e-grocer, Ocado, executes more than 9,000 orders a day, but struggles to make a profit. California-based Webvan started in 1999 and went bankrupt in 2001. It delivered fresh produce in 26 cities, but ran aground partly because it could not keep its promise of delivery in 30 minutes.

To boost margins, Indian e-grocers concentrate on monthly rather than daily purchases. A second strategy is to sell products with higher margins. Margins on pet food, for instance, can go up to 30 per cent. "The contribution of such items to sales is over six per cent, and we plan to raise it to 15 per cent," says Jhunjhunwala, whose monthly sales turnover averaged more than Rs 1 crore a month in the past year.

A third strategy is to sell inhouse brands, which improves margins by 20 to 25 per cent on staples. "We sell 7,000 SKUs, of which 300 are our own branded staples," says Menon of BigBasket. SKU or stockkeeping unit is the retail term for product identification code.

E-grocers get fewer deliveries returned than other online sellers - two to three per cent. The overall retail average is over 10 per cent. Most returns are because the customer was not available to receive the package. Chennai-based e-grocer Veggibazaar, which sells fresh produce, asks customers to indicate where orders can be delivered if they are not available - with a neighbour, maybe, or the security staff.

Perhaps the biggest threat to egrocers is giants such as the Future Group, which is testing a hybrid model to sell groceries online and in brick-and-mortar stores. Kashyap Deora, President of FutureBazaar. com, the group's online arm, which started selling groceries online in January, says: "We are doing pilots in 30 stores in Mumbai to check the feasibility of shipping online orders from the stores."

Saraf of Epiphany Ventures cites the success of British retailer Tesco, which operates offline and online. "It suggests that a hybrid model works best for grocery," he says. "A startup can't compete on procurement with a Reliance Retail, which has the entire supply chain mapped out." Sourcing efficiencies allow big retailers to offer discounts. BigBasket's Menon is undaunted.

"Once we have volumes, we'll try to move up the supply chain," he says. But BigBasket is the only e-grocer with funding. Its rivals will not be able to expand unless they attract investment. Newcomers such as FamilyKart are aware the clock is ticking. "We have a small window of opportunity," says Goel. "In a year we will have to be at a level where we can survive even if the big guns enter."

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