Mr. X returns home and finds that the grocery for the week is already over.
Technology: Well, I got a solution for you. Google provides a list of apps to order grocery online instantly to your location.
Mr. X opened these apps, chose the suitable ones, compared the rates and found out the best one to order from. He finds that the company is charging too much, and he has no coupons or discount vouchers at this moment. Presses back repeatedly and CLOSE. He prefers local grocery shops than these hyperlocal online markets.
Hyperlocal in nature, online grocery startups were launched to make our life easier and simpler. To capture a large portion of the market share e-grocers started expanding rapidly paying no heed to unit economics, city level profitability and market acceptability. Though the entire process might seem to be very hassle-free, yet online grocery startups in India are facing tough time in real life to carry along with its operations smoothly.
Peppertap, which raised US $51 million in its 18-month startup journey, is calling quits to online grocery retail from next month and pivoting to logistics business, while Grofers is shutting its operations in multiple cities. Certainly, there must be gross reasons behind such decisions of some of the top online grocery startups.
Related: What is the future of hyperlocal in India?
Here are 15 difficulties faced by the online grocery startups.
1. Customer’s unwillingness to pay delivery charges
Almost all the companies are giving free delivery above an order of Rs 500 (except Big Basket, Top Tomato, and My Grahak where the minimum order for free delivery is Rs 1000). But when the purchase is made for a small amount, it becomes highly uncertain that the customers will pay delivery charges if they can avoid it completely from a local grocery store. Moreover, the delivery charges vary largely from one company to another. They keep switching from one online store to another to incur the least delivery charge.
“We are firm believers that the shopping behaviour of consumers would continue to be multi-channel, however, the consumers’ habit of standing in a queue to shop for groceries stays our biggest competitor.” says Vijay Singh, MD and CEO, Aaramshop.
2. Difficulty to penetrate in small towns
Women, while bargaining, “Chalo na aapka, na mera, 100 Rs. mein de do.”
People in small towns lack means of entertainment. So, most of the housewives and office workers meet each other at the local mandis for shopping as well as passing time together. Bargaining is a hobby!
Moreover, in small towns, markets are not very far or they are not afraid of traffic jams, etc. Naturally, they don’t feel the need to order groceries online.
3. Thin gross margins
Online grocery startups operate at a thin margin of 5-7%. If the order is below 500 and startups don’t impose delivery charges, they ca incur a loss of Rs. 25. Forget profits.
“We operated on a negative margin per delivery and in such a scenario, the path to profitability looked very distant, at least two to three years,” Navneet Singh, CEO of PepperTap, said.
4. Focusing on horizontal expansion instead of vertical
Online grocery startups are busy competing and hence focusing to expand in as many cities as possible. In this process, they not only burnt VCs money blindly, they had to withdraw operations afterwards.
For instance, Grofers shut down it’s operations in 9 cities, namely, Bhubaneswar, Ludhiana, Bhopal, Kochi, Nashik, Rajkot, Coimbatore and Visakapatnam after suffering huge loss.
5. Homemakers are not tech savvy!
Most of the shopping is done by housewives and they are generally not very tech savvy. They dread the concept of running apps, comparing prices, ordering, etc and find it better to exchange some gossips with the veggie vendor. They even find happiness in extensive bargaining.
6. Are online grocery startups offering a Complete Solution?
With huge number of items and their brands, it becomes extremely difficult to maintain stock of all the items at the same time. Some items run out of stock, whereas some brands are not available as a choice in the online grocery stores. In both the cases, the customers rush to the nearest local markets. Customers do not prefer to wait in this case, since the same product is so easily available near their place.
7. Discounts are being availed by retailers and not by customers
“On many products such as butter and milk, there is a margin of just 4 percent to 5 percent. But if you run an offer of a 20 percent discount through an app, retailers themselves start using it to fill their daily stocks,” said CEO of a grocery app in India, who prefers to remain anonymous.
8. Not mastering the art of inventory management
Few online grocery startups opt for an inventory-led model. One among the few to store items is Big Basket. Maintaining inventory has its own advantages and limitations. Advantages are obvious. The company gets absolute authority over the products in the warehouses and their movement. Disadvantages being huge rent of the warehouses, cold storage and maintaining the excess inventory in this case are very cumbersome.
9. Infrastructure
There are different business models followed by online grocery delivery. Some companies have their own stores, while some tie up with local mom and pop stores. Having own store (like Big Basket) enables the company to have a complete control on their business. Such companies can control quality of the perishable items, meet high demands effectively, achieve economies of large scale but at the same time there is high maintenance and logistics cost. Colossal amount of money is spent on the transportation of materials from one site to another. Thus, the infrastructure consumes a significant part from the revenue.
10. Is competition a factor here?
Not just a factor, it is one of the most crucial factor for online grocery startups. Customers keep on swapping from one app to the other one and finally select the one that offers the best deal. This is the harsh reality. The online grocery startups have to focus persistently on the competitors’ move and change accordingly to survive in the market.
When it comes to competition, they not only face competition from the existing online grocery stores, but a huge competition from the local stores and the wandering push cart. The wandering push cart also sells fresh fruits and vegetables at the customers’ door steps. And many are not ready to change their habit of buying from the wandering push carts.
11. Freshness of fruits and vegetables
Yes, it does to all. If the customers are paying an extra delivery charge (in most of the cases until the amount is high), it is certain that they want the best quality.
We all have our own peculiar tests of selecting vegetables- we smell it, we prick it, scratch it, check it upside down only then that item is qualified to get a place in our basket.
Since there is no way to inspect the quality beforehand, delivering rotten fruits or vegetables due to mishandling, late delivery or unavoidable conditions cause dis-satisfaction among the customers and they might resort to supermarkets or local grocery shops after that.
Gurgaon based Pepper Tap with a fleet of 1200 boys has an attrition rate of 7%.
12. Huge marketing costs
Any online grocery store has to achieve two goals to sustain their business:
- Provide a comprehensive effective service, along with consumer satisfaction.
- Possess the inertia to break the age-old shopping tradition of people when it comes to grocery shopping, which will result in high sales.
To accomplish these, one has to spend an extensive amount of cash on marketing activities. Promotional activities, advertisements expend revenue and ultimately, profits turn into a loss. Some apps went ahead to the extent of offering money to retailers to collaborate up with them, which increased their burn rates.
Some such as Big Basket have even paid Bollywood actors like Shahrukh Khan, millions of dollars to become their brand ambassador.
13. Customer Loyalty
Customer loyalty is a major challenge in online grocery companies. Companies offer discounts and offers as incentives to customers to set new permanent customers. However, the customers keep on shifting from one app to another to see who is offering more discount.
Indian users have also become smarter. In order to keep availing the 20 percent discount offered by almost all the online grocery sites, people order groceries from 4-5 different mobile numbers they would have in the same household. Most e-grocers offer 20 percent discount only on first purchase, usually connected to a mobile number. The discount hungry Indian customers wane away as soon as the schemes stop.
So, it is extremely difficult for the grocery stores to maintain regularity in customers’ purchase.
Also Read: Is the startup bubble going to burst in India?
14. Matching the buying behavior of the customers
Let’s say someone likes Parle-G biscuits. What is the probability that all the residents in the city like Parle-G biscuits? Close to zero. People are different, so are their choices. And not that “this” choice remains constant forever, it keeps on changing constantly. If they do not find anything appropriate to their choice, they will quit ordering from the site.
If the customer is getting all his required items at home, he might not mind paying delivery charges, but even if one thing is left, he might not even avail the service. You have to be extremely particular when it comes to customer satisfaction.
15. Challenges in Operations and Training
Recruiting and training of delivery boys, cash handling coupled with logistical issues, along with handling of perishable products, wastage and product returns add to the woes of online grocery startups. These issues add to the cost of order fulfillment and further increase the cash burn. The online grocery startups depend heavily on the feet-on-the-street.
Moreover, the local retailers dread the usage of apps. Saurabh Singla, cofounder of LazyLad said, “There is an issue of adaptability with some retailers. Some are very open to the use of technology to enhance their business, but few of the retailers are quite skeptical about this.”
After going through the above factors, it is evident that running an online grocery startup is an uphill task. One fact that cannot be denied that many resort to online shopping of groceries as it has actually made their life more comfortable, while some prefer the conventional way. In this era of rapid evolution and revolution, India’s online grocery startups are sure to bring more innovation and establish themselves as a globally acceptable platform.
Rashika Daga
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