Online grocery game play: Can the segment avoid consolidation for long?

Recent spurt in investments into the space only point to intense competition between horizontal and niche players going forward

In March alone, India’s top two grocery e-commerce firms saw mega funding rounds. Grofers received fresh money from SoftBank Vision Fund, the largest investor in the world, and market leader BigBasket got the backing of Alibaba and a bunch of new investors who together put around $150 million. Both were late-stage series-F rounds.

Squarely put, the space is now defined by four camps: BigBasket, Grofers, Amazon Pantry (including Prime Now, a two-house delivery service) and Flipkart Supermart. The last two are offerings by large horizontal marketplaces which have shown unwavering intent to win the segment. Flipkart and Amazon have massively grown their grocery operations over the past two years. Even food delivery platform Swiggy has thrown its hat into the ring by announcing the launch of Swiggy Stores, an on-demand grocery delivery service.

Having four major players with identical services, targeting the same set of customers, has shored up losses at these online grocery delivery companies. And while talks of mergers and acquisitions (M&As) among different combination of players have taken place at several instances, it is interesting to see companies choosing to go solo rather than joining hands with rivals.

But the bigger question is will the sector be able to avoid M&As for long.

Even as online grocery startups have matured (BigBasket was launched in 2011), pushing sales years-on-year in a market created of their own accord, profits are still elusive. The combined losses of BigBasket and Grofers in FY18 were Rs 747 crore.

One might equate it to the larger e-commerce segment where profits are still miles away and money (losses) flows like water. But grocery has another problem — it continues to be a phenomenon only in the metropolitan and a handful of Tier-II cities.

The market is about 10-20 per cent in a user base of 90-100 million e-commerce shoppers, according to estimates collated from research reports. While new online shoppers are coming from Tier-II, -III and even -IV cities, they are not yet buying grocery, simply because a kirana store is just down the road.

The entire effort now is to get the average e-commerce shopper, especially the high-spending one in the metros, to buy grocery. BigBasket has started two-hour delivery, and so has Amazon. Flipkart is giving away select grocery items for Re 1 every day.

While the initial investment by major players went into creating logistics and storage infrastructure, now the excess capital is fuelling discount wars and efforts to undercut competition.

BigBasket, which has consistently maintained lead in the segment and attracted new investors, in 2017 reportedly held talks for a possible merger between itself and Paytm. The talks, led by Alibaba, a major investor in Paytm, ultimately culminated in Alibaba directly investing in BigBasket in February 2018.

Over 2017, there were also talks between BigBasket and Grofers for a merger. At the time Grofers had scaled down operations and was said to be struggling. “When firms reach a scale and size, they are always in talks with other players (for mergers and partnerships) all the time,” said an investor in BigBasket. Grofers, which is backed by Sequoia and Tiger Global Management, has since raised follow-on funding, mainly from SoftBank, which now owns about 43 per cent in Grofers.

Also in 2017, a policy change allowed 100 per cent foreign direct investment in food retail, and consequently all players jumped into action to create full-stack inventory-led grocery units. Together, Amazon, Big Basket and Grofers had lined up investment proposals to the tune of $695 million. However, certain conditions in the policy, including mandatorily having separate warehouses for food items, resulted in these plans not taking off.

There were talks that even Amazon was considering buying BigBasket, but the retail major in 2018 decided to instead invest in More, a supermarket chain owned by Aditya Birla Group. The deal hasn’t materialised yet, but it has been approved by the Competition Commission of India. According to the arrangement, Amazon and private equity firm Samara Capital would pay Rs 4,200 crore for More.

Flipkart, which is late to the party, having launched grocery only in 2017, is set to build out operations organically. In January, the grocery unit within Flipkart had grown to a team of 40 employees as the Supermart hit a monthly sales-rate of Rs 50 crore.

A reason for players going all out for growth is the low penetration of such a service in India. Online food and grocery segment in only 0.1 per cent of the overall food retail industry, according to RedSeer Consulting. In the UK, China and the US, this stands at 6.9 per cent, 4.2 per cent and 1.4 per cent of the overall food retail segment, respectively, showing that the potential of growth is immense.

“We expect online grocery to be the fastest-growing segment (with a compound annual growth rate of 65-70 per cent between FY17 and FY20) in e-retail and almost quadruple over the next 3 years to about Rs 10,000 crore in terms of revenues,” a 2018 report by ratings agency CRISIL noted.

“Investments in technology, new strategies adopted by players, such as the introduction of private labels, same-day and next-day deliveries, and B2B food services, would all aid growth of the sector,” the report said.