The Rush for Online Commerce in Indian Retail

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Unorganised retail – the next wave of growth

Indian Retail is embracing digital like never before, especially the unorganised segment. Look around and one sees numerous examples of this. Be it the neighbourhood kirana shop, the mobile vegetable cart vendor, the local baker, the small fresh meat and fish vendor – every business has a foot in the door of digitization.  This may not be in the form of sophisticated websites or fancy apps but through simple, ingenious combinations of everyday technology – such as WhatsApp and UPI-based payments that provide a good-enough or even great experience for their customers.  The trend which was clearly there prior to Covid has only accelerated this year due to logistical and other constraints during lockdowns.

The pandemic especially has brought in several new players and intensified action from investors, big players and startups.  In recent times, the industry has attracted interest and investment some of the largest Indian corporates and foreign investors who are looking to ride this wave – both offline and online. To name a few – Reliance Retail and its digital arm, JioMart (which has over US$10B investment from the likes of Facebook, Google and investors); Tata Group’s offline network, its app (Tata Cliq), its imminent stake in Big Basket (India’s largest grocery ecommerce) and its plans to build a super app for consumers; Walmart’s increasing stake in Flipkart, Amazon’s significant penetration in the market. The numbers justify the interest. The Indian Retail industry is estimated to be a US$1.2 Trillion market by 2023 (according to the management consultancy firm, RedSeer). The pie is huge and even a small portion of it would provide great scale to any business. 

Despite significant challenges in supply chain and inventory tracking, ability to adopt to technology and sheer fragmentation of the market, all players areplacing their bets on the unorganised segment. With over 85% of trade happening through this segment – it is a market that cannot be ignored.

Everyone wants a piece of the Online Grocery pie

Within the unorganised space, cracking the e-grocery delivery space is the ultimate prize. While fashion, apparel, accessories, electronics segments have seen significant growth; online grocery is the fastest-growing (57% CAGR according to RedSeer). As per a recent RedSeer report, Online grocery is expected to reach a market size of US$18 Bn by 2024, and comprise 2.3% of the overall food and grocery market in India. Grocery is a hugely attractive segment – it has the highest customer-stickiness through weekly or monthly purchases of consumables and is unparalleled in terms of potential growth opportunity. It is also the most challenging segment due to inherent supply chain challenges and low margins. With everyone from established players to startups alike making attempts to “organise” theunorganized grocery segment through technology offerings, we see the space segregated largely into four buckets.

  1. Online Market Places & Inventory Led players (Amazon, Flipkart, Reliance Jio, Big Basket) – typically big players with deep pockets, strong logistics networks;some also have offline retail presence
  2. Aggregator Platforms focused on Customers(Swiggy, Zomato, Dunzo etc.)they were in the aggregation business already (typically, food delivery) and quickly swung to grocery during the pandemic
  3. Aggregator Platforms focused on the Supply Chain (Udaan, Jumbotail, ShopKirana) – they are looking to enable retailers by bringing in efficiencies upstream (distributor and supplier side solutions)
  4. New Age Fintechs offering online presence to Retailers (Dukaan, Bikayi, DotPe etc.) – they are looking to leverage the extensive merchant base to whom they already offer Credit, Accounting or other technology-based financial services

Online Market Places & Inventory Led players (Amazon, Flipkart, Reliance Jio, Big Basket)

They largely control the customer experience and once ordersare placed on the platform, they are fulfilled through the store or their warehouses. These players leverage categories like Fashion, Apparels, Electronics etc. in their marketplace model to cover for the lower margins that Grocery has. The high cost of logistics and last mile delivery make FMCG and Grocery loss leaders.

Hence, they look at outsourcinglast mile delivery to the neighborhood stores and reduce the costs; but are unable to succeed as they do not have visibility on the products and prices at the shop-level and the customer experience is inconsistent.

To increase margins and engagement, they offer private label brands to these stores and consumers which is a threat to the established FMCG brands who have developed this channel.

Aggregator Platforms focused on Customers(Swiggy, Zomato, Dunzo etc.)

They extended their aggregation service of local restaurants to grocery stores. They simply aggregate the stores in the neighborhood and present them through their app. The catalogue and price are largely controlled by the platform. The platforms also handle the customer experience and the promise of delivering in 1-hour.

This model also has lowmargins since grocery does not justify thehigh costs of delivery agents;as opposed to the food delivery business up to 30% commissions are obtained. With the aim to cut costs and improve efficiencies, they have resorted to creating dark stores (fulfillment centres) that wouldstock products that are often ordered in that locality

Aggregator Platforms focused on the Supply Chain (Udaan, Jumbotail, ShopKirana)

These players focus on disintermediating the Supplier and Distributor ecosystem. They offer products and credit to retailers to buy from the platform.

A major challenge they haveis an aggregated exposure of the credit risk which was earlier decentralized across multiple distributors

New Age Fintechs offering online presence to Retailers (Dukaan, Bikayi,DotPe etc.)

These are largely fintech players who offer a Do It Yourself (DIY) platform for the retailer to setup a store and offer their products online to their existing set of customers.  However, this does require handholding the retailers and offering support to them – despite the DIY label.  Only those retailers who are digital savvy (which are far and few) are able to adapt well to these platforms.

It is a long haul. Who will prevail?

The players who are willing to engage with retailers, handhold them through the journey and who are genuinely focused on providing value to the small retailers are the ones most likely to succeed in the long term.  Short term focus and “quick-fixes” need to be scaled effectively to stand the test of time.  Just this year, Zomato which ventured into the e-grocery delivery business, scaled down or shut down in various cities within afew months of starting it.  Success in this space requires deep pockets and a deep understanding of the market coupled with the ability to be nimble and innovative. The market is still evolving and there is no one size fits all. 

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