Few will disagree that India’s online grocery market offers vast opportunities. Few will agree, however, on how to tap into those opportunities.
In fact, many even argue that India might not be ready yet to buy groceries online without discounts and that it’s a low-margin business.
But there is another side to the story. BigBasket raised $150 million in March, hinting that investors are still looking for investment opportunities in the segment.
What sets apart BigBasket from the scores of others? It has an inventory-led model and is run by a retailer instead of an IT person, believe the founders of Gurgaon-based Grocermax, which is one of BigBasket’s rivals.
Grocermax would know the importance of a retailer running a retail company. For, it was co-founded by K Radhakrishnan, a former CEO of the value retail format of Reliance Retail Ltd, India’s biggest retailer.
“Nothing stops an IT person from learning retail but it takes a bit of time and that’s where they make mistakes and burn cash,” says Radhakrishnan. “Knowing the retail business in and out helps us to conceptualize and run the business better.”
Radhakrishnan spent eight years at FoodWorld where he worked in both operations and merchandising units. He was also hired by Future Group’s Kishore Biyani as CEO of Future Fresh Foods.
Grocermax’s other co-founder is Gaurav Juneja, a former India executive director of French investment bank Bryan, Garnier & Co. Juneja says the e-grocery market is not to blame, but the cases of Grofers and PepperTap indicate the flaws in the way they are approaching the market.
Juneja estimates the size of India’s overall grocery market at almost $300 billion. Online shopping is currently a fraction of this market and so offers tremendous opportunities, he says.
Grocermax, which began operations a year ago, claims the experience of co-founder Radhakrishnan in food retail, his understanding of the business along with control on inventory (just like BigBasket) and a distributor-led business model will help them succeed in a market where many bigger, older rivals are struggling.
Building a retail business is not easy as it involves a complex supply chain. The perishable nature of the goods to be delivered at the doorstep makes it even more challenging. That’s where experience helps.
While most e-grocers typically tie-up with retailers to deliver food items to customers, Grocermax has avoided doing so. It has a hybrid model (both marketplace and inventory and works with distributors and wholesalers.
“From day one, we knew there’s no point tying up with retailers as they won’t be able to give us accurate data in terms of the inventory they are carrying and not be able to share more than 5-6% of margins even when we happen to be their largest customer,” says Radhakrishnan.
Tying up with distributors also helps Grocermax have more stock-keeping units on its platform and price its products competitively; the startup claims it has about 8,000 SKUs, compared with 1,500-2,000 at e-grocers operating on a marketplace model.
“Because, their (other e-grocers) SKU is small, their bill value is small, ranging between Rs 300-500. Our average bill value is Rs 1,450 thanks to the number of SKUs,” claims Radhakrishnan.
Juneja adds that Grocermax doesn’t need 4-5% commission from the retailer as it makes the entire retailers’ margin like BigBasket does. However, BigBasket operates a large centralised distribution model whereas Grocermax has a decentralized distribution model. “We make 16-18% margins on our overall merchandise, broken down by categories, brands, and SKUs. On fruits and vegetables, we make an upwards of 30-33% margins.”
Grocermax has also avoided expanding rapidly, a mistake many others made. It is currently operational only in Gurgaon. It is looking to cover all of Delhi-NCR in next three months and then enter Bangalore. Juneja says the startup, which raised $2 million in 2014 even before setting up operations, is “profitable after delivery and very close to profitability at the operational level”.
Grocermax is also talking to PE investors and strategic players to raise around $10 million to fund its expansion. “We are also in talks with large horizontal online players for whom grocery as a category is of strategic importance,” says Juneja.
Does the failure of PepperTap or the financial muscles of BigBasket worry Grocermax? No, the founders say.
“E-grocery is so large that it’s not a winner-takes-all market,” feels Juneja. “There is clearly room for four-five sizeable players in the market.”