Progressive Grocer - July 2015

Progressive GrocerA hotbed of innovation

E-grocery is spawning new models of supply chain and distribution thanks to the urbanisation trends and a growing demand for lower costs and greater convenience

Going shopping for groceries in India used to be a family outing, but this is now steadily changing. Work hours are extending. Urban traffic and parking have become a challenge. Children have much busier schedules. So, there is an increasing set of shoppers who see grocery shopping as a necessary but not an enjoyable task, and are open to options providing greater convenience and lower prices. This is where the Internet has come in to allow some enterprising start-ups create a new business model based on very high levels of service and lower cost. McKinsey Global Institute has forecasted that urbanisation trends will create thirteen additional megacities in India by 2025. So, it seems that the demand for convenience is likely to spread wider as urban India congests its way forward. In this, e-grocery will be a field of rapid innovation fuelled by an intense focus on customers and their needs.

Grocery Shopping

Other than customers, e-grocery has also caught the fancy of investors. As a nascent industry, e-grocery still requires funding to survive and grow. So, while there are examples of companies that bootstrapped with minimal funds, to grow in scale they need a serious infusion of funds. The funds are typically required to support three areas – the technology to make it happen, discounting as all retail does at times, and very importantly, into the supply chain infrastructure. Let’s take a closer look into what happens in the supply chain and how it can make or break an e-grocer. As we shall see, there has been a lot of innovation going on here and the jury is still out on the winning model.

The most significant innovations have been in marketing and delivery. The two are closely linked with each other, far more so than in traditional retail. Delivery has occupied a huge mind share of the industry. After all, the main promise is one of convenience. So, all models of e-grocery have the challenge of delivering on time and the complete order. The delivery problem in India is quite unique- cramped roads, collection of cash on delivery, low levels of education among people hired for the front line and high attrition. And, of course, incredibly low margins. Unique models are required if an e-grocer is to survive and grow sustainably in conditions such as these.

Delivering on time a complete order creates a powerful brand for an e-grocer. Consistent performance builds trust among customers and has led to the concept of time slots for delivery. Anyone who has waited at home for a critical courier or a passport delivery will know the value of being able to specify the time slot in which delivery will happen. It’s not just about convenience for the customer. By bringing precision into delivery, e-grocers can increase margins. A locked door means wasted money and a dissatisfied customer. Moreover, if a delivery is delayed, the customer might not be able to wait. So, she may have already picked up those essential ingredients for the dinner she had planned.

Precision in delivery also allows for other efficiency mechanisms. The clockwork precision needs to go back all the way to the stocking policies, picking process and routing of delivery vehicles. Improvements in each of these areas bring in efficiencies. For example, if pick-up is rapid and efficient, the space needed in warehouses is less than the retail space needed for customers to browse in. Warehouses are anyway located in lower cost locations than retails stores. Secondly, delivery routing can make use of techniques like milk runs that increase vehicle utilisation and lower total cost.

Marketing has become truly one-to-one with e-grocers. Each customer can experience a customised offering, as e-grocers have started serving web pages specific to the customer based on past buying behaviour. So, a premium customer might see premium products on the first page, whereas a budget customer might see great value deals. The added convenience of stored shopping lists helps overcome items that have been forgotten and having someone from home dash to the corner store to pick it up. This is an added convenience for a customer and a plugged source of revenue leakage for the e-grocer. Finally, with orders in hand, e-grocers do not need surrogate measures for lost sales. It stares them in the face, when the delivery happens and the customer points out that something is missing.

With the move to mobile applications, the customer can really buy what they want anywhere they want. Since all the customer specific data is stored centrally, it is possible for a customer to order from the PC at home, at work, in a friend’s house or from a mobile. Across all these devices, automated systems will do a more effective job of cross-selling and up-selling than can be expected on ground by staff in retail outlets. Technology is evolving at an incredibly rapid pace and e-grocers will tap into this change. The gap in the pace of change between e-grocers and their traditional rivals will widen.

In such a dynamic industry it would be strange if everyone agreed on the way ahead. The e-grocery business is no different. Even as companies look to overcome the common challenges, they are taking different routes.e-grocer quote The most fundamental difference is the basic model of e-retailing itself, the choice between the inventory based model and the marketplace based model. In the former, the e-grocer buys stock and sells it, just like a regular retailer. The difference is that there are no retail stores and no front line staff , two areas that occupy a lot of time and funds of the traditional retailers. The best known example of this model is Bigbasket.com. In the marketplace model, an e-grocer connects customers with regular kirana and other stores in the neighbourhood. It (e-grocer) books the order and has delivery men who pick up the goods from the kirana store and delivers it to customers. PepperTap.com and Aramshop.com use this model. On the other hand, LocalBanya.com uses a mixed model, partly inventory-led and partly JIT (just in time), where it sources slow moving items the evening before.

In our view, the two base models, inventory-led and marketplace, will service completely different needs. The mainstay will be the inventory-led model. The reasons for this are buying power, scale and process capability. The traditional tug of war between brand owners and retail will play itself out in the e-grocer space as well. As e-grocery scales, the pressure to increase margin by capturing value addition will lead to store brands. The share of space and the discounting of store brands can be expected to increase. As scale increases, the discount e-grocers can demand from manufacturers will increase. Th is is possible only if there is consolidated buying, which is not an option for the marketplace model. Scale of operations will lead to investment in automation, and the optimisation of handling and delivery models. Th is requires centralised planning and execution, which is also not possible with a distributed model. Th is inability to scale is particularly the case when it comes to quality processes that are essential to fresh products. Finally, the investments mentioned will help the inventory-led model to consistently increase operational consistency, a vital factor in customer satisfaction. The marketplace model, with its intensely manpower dependent operations models will not be able to scale as effectively. The difference in experience can be seen in the difference in trying to book a hotel room online versus booking a flat through Airbnb.

So while inventory-led models can work well with scale, they will not do so well with highly specialised needs. The technology can handle the long tail of specialised requirements, but inventory-led models will find it hard to deal with large numbers of very small and unpredictable requirements. They will be limited by a combination of traffic and congestion, as well as the fact that their core business itself is so big and growing that they will ignore these less scalable areas. Th is will be addressed by marketplace models. Another area where marketplace models are likely to score will be for small volume, urgent requirements. Scale makes it difficult to deal with the tiny but urgent requirements. So, a rush order in 2-3 hours might be something that a marketplace model can make high margins from, but will mess up a mainstream e-grocer. It is likely we will see these models diverge and settle into different spaces, just as Amazon and eBay occupy different spaces.

Now one must remember that these are conjectures. Educated guesses will still be guesses. If armchair predictions were so accurate there would be many more successful start-ups. The reality is much harder to work through, as every idea requires weeks and months of execution. So, the e-grocery industry segment is bound to have new twists and turns as it innovates and executes its way forward. So, a final word of advice, watch this space closely.

The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd