Online groceries is a tough nut to crack. So why are India’s e-commerce giants obsessed with it?

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The next frontier for the great Indian e-commerce battle could be shampoos, cereals, fruits, and vegetables.

Despite a failed attempt two years ago, India’s largest homegrown e-commerce major, Flipkart, is once again experimenting with online grocery retail with a service called Supermart. The company is currently running Supermart in a pilot stage for its employees in Bengaluru. “We intend to scale it (Supermart) up to all customers in Bengaluru and take it to other cities in (the) future,” a Flipkart spokesperson told The Economic Times newspaper. Flipkart did not respond to an email query seeking details about the service.

Flipkart’s move into the segment comes over 20 months after its fierce rival Amazon India launched grocery sales in February 2016. This is one of the “fastest-growing categories for” Amazon, a spokesperson said.

The two giants queuing up for online grocery retail is a bit odd, especially given the fact that the segment has seen a high number of casualties over the last couple of years, and that the companies that did survive have struggled to grow. For example, Gurugram-headquartered Grofers has had to downsize its business, its one-time competitor PepperTap closed down after just 17 months, and other pilot projects have failed.

But, if executed properly, getting into the pantry could be the next growth lever for Flipkart and Amazon India. “E-commerce grocery shopping is expected to grow rapidly, particularly among the digitally-centered millennial generation. Consumers are beginning to change where and how they buy groceries, and multi-channel supermarkets have to meet these emerging needs,” said Anindya Ghose, a professor at New York University’s Stern School of Business. “If an e-commerce retailer is not jumping on board the grocery train, it may not be around to catch that ride a year or two later.”

Why groceries?

In the first wave of e-commerce growth in India, electronics and apparel emerged as the high-growth segments. Companies could attract customers with deep discounts, easy payment schemes, and by bringing international brands within their reach.

But grocery has remained largely untapped. “Even after 15 years of e-commerce in food retailing, we’re talking about at best 3-5% market share (of overall food retail), compared with 50% in travel or 35% in electronics in mature markets,” Ghose said. This leaves huge headroom for growth.

Moreover, grocery retail is a high-volume business, since customers shop for items like bread, flours, and cleaning supplies weekly or monthly, but buy new phones or large electronics only once in a while.

“If you want to transform a person’s shopping experience you need to look at where a customer spends the most time. The answer is FMCG (fast-moving consumer goods) and grocery,” Saurabh Srivastava, director for the FMCG category at Amazon India, told YourStory last month. “Customers interact and engage on a daily basis in this category. You don’t buy a mobile phone or a fridge on a daily basis.”

Amazon’s grocery segment has seen a 250% growth in demand since its launch, Srivastava told Quartz. The company currently offers 1.9 million products in this segment from 9,000 sellers, he added.

Crash and burn

But selling fruits and vegetables online is a very different challenge from hawking smartphones. From wafer-thin margins to expensive logistics, grocery retail has its own requirements, which have led to the death of several startups, including Sequoia Capital-backed PepperTap.

Clocking high growth in a handful of cities, especially metros, is possible. Yet, expanding online grocery retail to a large-enough scale across hundreds of cities is extremely tedious because it requires tying up with local suppliers, hiring hundreds of delivery staff, and ensuring proper storage facilities in each market.

And such attempts have failed in the past in India. In 2015, Flipkart had launched its groceries delivery app, Nearby, as a pilot in Bengaluru. But just five months later, the company shut the business down reportedly due to poor demand and tight margins.

In January 2016, Grofers shut operations in nine cities as it was unable to generate enough demand to sustain its business in those places. And a few months later, the country’s then third-largest online grocery retailer, PepperTap, shut shop despite having raised over $51 million.

“If we were going to stick to our two-hour delivery promise (which was rapidly becoming a key differentiator in the markets for us), we needed to build spare capacity in every one of the 17 cities in which we were present,” co-founder Navneet Singh had said at the time. “Compounded with the necessity for discounts, this meant that the cash we were burning on every single order was increasing rather quickly with no immediate end in sight.”

So, even as Amazon India and Flipkart have cracked the logistics for their existing categories—including delivering to far-fetched destinations—grocery will require them to build separate capabilities.

“Unlike non-grocery retailers, online grocers cannot have a marketplace model for any of their fresh foods. Furthermore, perishability of the products makes it time-bound to be delivered,” Shabori Das, senior research analyst at market research firm Euromonitor International, wrote in November 2016.

Big baskets and coveted customers

All these challenges are unlikely to deter Flipkart and Amazon India. After all, the online grocery retail segment is currently estimated at around $1 billion, with a projected compound annual growth rate of 55% over the next four years.

But the contest could take an interesting turn if either of the giants succeeds in acquiring an existing online grocer, particularly Big Basket. For several months now, there have been rumours about Amazon holding acquisition talks with Big Basket, although the two have so far denied the reports. For Flipkart, unlike the last time when it attempted the venture, there are no financial constraints as the company has over $4 billion in cash in its bank, which gives it room to pour money into its grocery basket, and even make an acquisition.

“The grocery segment is going to be incredibly important for the e-commerce battle in India. Why? Well, because given the much lower margins in the grocery business, if you lose 10% of customers to a competitor’s online proposition, that makes a big difference to your topline,” Ghose said. And going by trends that have played out in the US and Europe, Ghose added, online grocery retail typically attracts the most profitable customers: dual-income households and customers who prioritise convenience over price.

“These are the kinds of customers e-commerce retailers should care about,” he said.

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