E-grocers turn a corner during pandemic, but challenges are far from over

The online grocery market has been an attractive segment in India, with several investors seeing a huge potential in it. Multiple players have attempted to make inroads into this market over the years with limited success.

The pandemic has helped the online grocery segment to expand when other retail categories have suffered due to the lack of demand. E-grocers also gained as local Kirana shops operated under a restricted environment, and overall reluctance among consumers to venture out of their homes.

The online grocery market has grown 30x in the last 7-8 years with a market size of $3bn. And it's only a beginning as e-grocery has hardly managed to gain a single-digit share of the overall market.

E-grocers are expected to grow over 59 percent CAGR and secure a market share of $18 bn for themselves by CY24. However, that is only the tip of the iceberg as they have an addressable market of a whopping $293 bn ahead of them.

E-grocers have managed to gain the attention of online buyers. India has ~15.4 crore online transacting households. Out of that,~13 crores are already using e-grocery platforms or willing to try. However, achieving penetration is a big challenge for these platforms as ~55 percent of the addressable market lies beyond tier-II cities. Hence, they will require to create the necessary infrastructure in smaller towns, a region that has low coverage so far.

Sensing the potential of the category, several platforms have emerged within the e-grocery space. They are creating new categories within the overall market. Apart from traditional grocery specialists, new players have emerged focusing on meat and dairy products. Offline retailers have also started venturing into omnichannel offerings to leverage their knowledge of local geography and customer psychology.

These retailers are hitting the market with differentiated models to achieve scale and profitability. Based on their business dynamics, they are choosing business models with a focus on A) inventory efficiency, B) hyperlocal focus, and 3) hybrid model.

The inventory model allows them to control quality and price but has higher logistics costs. Hyperlocal models include partnering with local merchants to serve as logistic points. The hybrid model allows them to use their own stores to provide a smoother last-mile delivery.

Lockdown has certainly helped e-grocers, with a surge in the number of app visitors and a steady rise in the number of orders. During CY20, Big Basket/Grofers saw a 4x/3x surge in daily orders, with a steady rise in average order values. However, with ease in restrictions, neighbouring stores have started to operate again. It presents a challenge for e-grocers to sustain the customer base that they gained during the lockdown.

Historically, the players in this segment have struggled to maintain profitability due to high logistic costs and complex inventory management.

In India, a large (65 percent) quantum of the e-grocery addressable households is price sensitive. Low pick-up in the high margin-premium products category has forced the operators to work with wafer-thin margins. They have also struggled to expand their unit economics due to that.

Dealing with value first customers, e-grocers are increasingly targeting complex inventory management practices like efficient bulk purchasing, lowering delivery costs, and expanding the order size per customer to drive profitability.