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Online grocery regains its mojo

Online grocery segment will grow twice as fast as overall e-retail in the next three years.

Rahul Prithiani        Last Updated: October 5, 2018  | 21:41 IST
Online grocery regains its mojo
Rahul Prithiani, Director, CRISIL Research

Food and grocery (F&G), an underperformer among online retail segments so far, is expected to emerge as the fastest-growing segment over the next three years.

As per CRISIL Research estimates, the segment will log a compound annual growth rate (CAGR) of 65-70% between fiscals 2018 and 2021, with revenue quadrupling to ~Rs 17,000 crore. That's twice as fast as the 30-33% CAGR the overall e-retail industry is expected to log.

Growth would ride on renewed interest and reworked strategies of the players. Besides, there is a huge potential waiting to be tapped - to give a sense, while F&G accounts for over 55% of the total retail industry in India, online F&G is a paltry 0.1% of the total F&G retail.

Given the low penetration and huge growth potential, the segment has seen a surge in interest from large players and investors. Investments in F&G increased by almost 14 times in fiscal 2018 to ~Rs 44 billion, from ~Rs 3 billion in fiscal 2017.

Major incumbents such as Big Basket and Grofers, as well as new entrants such as D-Mart, Reliance, Godrej and Tata, have sharpened focus on the segment, even as marketplaces such as Amazon and Flipkart have announced an investment commitment of ~Rs 5,300 crore in online F&G retail over the next 3-5 years.

In the next three years, though, the focus of these players would largely be in the metros and Tier I cities considering even these markets are highly underpenetrated.

Historically, the focus of the online retail industry has been more on segments such as electronics, footwear and apparel - much less on F&G. This is due to the relatively higher inventory cost involved in F&G given the perishable nature of products, requirement of strong back-end infrastructure and relatively low gross margins.

Despite this, F&G saw a spurt in the number of online players between 2012 and 2015. Aided by a low base, high discounts and heightened investor interest, it grew at a fast pace initially.

However, most of the players employed a hyperlocal model - partnering with local retailers for grocery delivery - which became difficult to sustain. As a result, the players burnt their hands given issues related to quality check, inventory tracking, stiff competition and thin margins.

Thus, F&G, which raised significant investments till fiscal 2016, saw the flow dry up the very next fiscal. This led to many start-ups folding up within 1-2 years of starting operations.

F&G retailers appear to have learnt their lessons well. In order to get a higher and sustained share of the customer wallet, they are going all out to ensure stickiness. To overcome the issues related to the hyperlocal model employed earlier, the players have set up fulfilment centres for storage, faster delivery and tied up with select large brick and mortar retailers.

Increased funding has helped them invest in the back-end infrastructure and some have employed inventory-based models where they control end-to-end value chain and provide seamless customer experience. Besides, the players are investing in technology and adopting new tactics such as introducing private labels, same day and next day delivery, and B2B food services.

If anything, the players could take a cue from the models that have worked elsewhere. In the US, for instance, the companies are increasingly adopting the omni channel route, straddling both online and offline channels. Customers, too, are increasingly embracing this route which allows them to click and collect, get speedy delivery options as well as have a touch and feel of their fresh products.

The model could work in India, too. Sample the success factors for online F&G retailing: efficient supply chain management, high stock turnover ratio, better inventory management, economies of scale, higher share of private labels and last-mile delivery. Many of these are easier to manage if a player has both physical and online presence. While offline presence helps provide customers a touch-and-feel experience and an immediate-purchase option, online presence helps in faster expansion with relatively lower fixed costs.

That said, growth in e-retail can be severely impacted if the draft e-commerce policy is implemented in its current form. The policy provisions will make investments difficult and can pull down growth of the sector as the big players with foreign ownership will not be able to compete and expand aggressively.

However, consultations with various stakeholders are still afoot, and we could see several changes before the policy is finalised.

Rahul Prithiani is Director, CRISIL Research

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