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Cover Story

Amazon and Walmart bet big on Indian grocery delivery

Local startup Grofers tweaks business model as battle for users heats up

MUMBAI -- It is a sweltering Monday afternoon just outside of New Delhi, and workers at Grofers’ 40,000-sq.-foot grocery warehouse are racing to beat the clock. Fresh fruits, vegetables and meats are quickly but carefully packed into boxes filled with ice to protect them from the 40 C heat, then loaded along with nonperishable items into Grofers' distinctive orange-and-white delivery vans.

Those vans need to be on the road from the warehouse in suburban Manesar well before New Delhi’s notorious rush hour kicks in at 6 p.m., otherwise Grofers will disappoint customers like Naman Agarwal, who is expecting his groceries between 5 and 8 p.m. Even a slight delay getting to the first customer could have a ripple effect on the entire delivery chain. There is no room for mistakes.

If all goes well, the drive to Agarwal’s house should take an hour. The driver, Ishwar Singh, uses a geocoding navigation system to locate the best route to reach each customer. Straying off-course by as little as 200 meters can lead to delivery delays.

Thanks to skillful navigation and a little luck with the traffic, the Grofers van pulls into Agarwal’s drive at around 6 p.m. He is a happy customer -- the food has made it in time to cook the family dinner.

“We are very happy with their service,” said Agarwal, a Grofers customer for two years. “They deliver on time and their prices are good, too. We don’t mind waiting for a day for the delivery.”

 Ensuring on-time deliveries is a major challenge for grocery companies like Grofers. (Photo by Takaki Kashiwabara)

Grofers, launched around five years ago in Gurgaon, near New Delhi, is in the midst of what is shaping up to be one of the world’s fiercest e-commerce battles. Attracted by a fast-growing population and a rising middle class, foreign investment is pouring into India’s nascent online grocery sector.

In May, U.S. retail giant Walmart announced it would spend $16 billion to buy a 77% stake in Flipkart, India’s largest e-commerce company. In February, China's Alibaba Group Holding and Abraaj Capital, based in the United Arab Emirates, pumped $300 million into BigBasket, India’s largest online grocery retailer. Grofers raised around $62 million in new funding from SoftBank of Japan and Tiger Global. And Amazon -- which stepped up its push into the U.S. grocery market with its $14 billion purchase of Whole Foods last year -- is reportedly planning to increase its Indian investment from $5 billion to $8 billion.

The potential is huge. The online food and grocery business in India topped nearly $1 billion in 2017 and analysts at RedSeer Consulting expect it to reach $5 billion by 2020, with a compound annual growth rate of 72%. The segment will likely be a key driver for the overall online retail industry, which consultancy CRISIL expects to grow 2.5 times to $28 billion by 2020.

But if the potential is high, so are the risks. Grocery has always been a low-margin, competitive business, and online grocery is no different.

“Grocery e-commerce has many limiting factors, from price-conscious consumers to difficulties in transporting perishable items from the farm to the warehouse to the consumer,” said Eric Haggstrom, forecasting analyst at eMarketer. “Large investments by e-commerce players in logistics infrastructure and technology, as well as new business models such as the online-to-offline model, will solve some of these problems.”

Haggstrom does not believe groceries will become a large share of India’s total e-commerce market but says it will prompt greater overall spending online. “A consumer that purchases even a small amount of groceries every month on an online platform will be more likely to make larger purchases online instead of at a brick-and-mortar retailer,” he said.

No one knows the risks of online grocery delivery better than Albinder Dhindsa, Grofers co-founder and CEO.

“Someone once said to me: Grocery is a money pit -- you can throw as much money as you want but nothing will come out of it unless you are targeting a demography or a geography,” he told the Nikkei Asian Review in an interview.

In other words, according to Dhindsa, success means either dominating a particular area -- a geography -- or catering to a particular demographic.

“Most of the grocery players in the U.S. thrive because they are regional,” he said. "You either play geography or demography -- like Walmart vs. Whole Foods. If you are not either of them, you are going to die,” Dhindsa said. "Ours is a demography purpose so we don’t really think about what the [other] guys are doing."

Dhindsa has already experienced setbacks, and Grofers was forced to overhaul its strategy in 2016. Originally the company employed a "marketplace" strategy, where it would take orders from customers, fill them from various stores and then deliver the products to users' homes. Now Grofers maintains inventories in its own warehouses and fills orders directly.

Grophers warehouse Grofers maintains a 40,000-sq.-foot warehouse in Manesar, a suburb of New Delhi. (Photo by Takaki Kashiwabara)

“The shorter version is we ran out of merchants,” Dhindsa said. “Creating that organized distribution itself creates an opportunity that might actually be bigger than the marketplace opportunity, which is why we decided to make the change and invest in supply-chain and distribution. We thought it would be more durable, and we would be able to capture more margin. As a business it made more sense."

Grofers, which operates in more than 20 cities in India, wants to capture areas lacking organized retail -- where mom and pop shops dominate, in other words -- and cater to middle- and lower-income shoppers. Dhindsa does not see players such as Amazon and Flipkart as competition -- at least yet -- but he is waiting for Walmart to spell out its strategy in grocery.

The road may be long and bumpy for all the players. It certainly has not been easy so far. In the last five years, at least 100 local and hyperlocal delivery apps have shut down. In 2015, on-demand grocery startup LocalBanya closed up shop, followed by PepperTap the following year, despite having the backing of investors such as Sequoia Capital, the powerful Silicon Valley venture capital firm.

Grofers uses its own IT system to manage inventory. (Photo by Takaki Kashiwabara)

Globally, too, cracking the online grocery market has been a challenge. During the dot-com bubble, Webvan of the U.S. famously went bust after burning through $1.2 billion.

Mastering logistics will be one of the key challenges as customers demand fast or even same-day deliveries. India’s snarling traffic jams, weak infrastructure, narrow lanes and unplanned housing complexes are all potential obstacles to on-time grocery delivery.

Touch and feel

Another big challenge is cultural: Many Indian shoppers enjoy haggling with local grocers for better prices, or simply like spending time in the outdoor bazaars. It is more of a social scene, especially in small towns and cities. For many, seeing and touching fruits and vegetables is essential, and street vendors are frequent sights outside residential complexes. Big wholesale local markets offer prices that seem unbeatable.

For many Indian shoppers, a trip to the local market to buy groceries is a weekly ritual. (Photo by Ken Kobayashi)

For 30-year-old Mrudula Shukla, an administrative executive with a multinational company, a trip to the local wholesale market is a weekend ritual. A kilogram of tomatoes at her local market, near Mumbai, costs at least 5-6 rupees less than at retail vendors. She is tech-savvy but said she still prefers her shopping to come from such markets and the local vendor. “I will only use apps if products come cheaper,” she said.

Another challenge, as TRA Research chief executive N. Chandramouli points out, is the changing behavior of young Indians who are cooking less. There are so many meal delivery apps that many choose not to spend time in the kitchen.

Undaunted by such obstacles, Flipkart is reportedly setting up a grocery supply chain for Supermart, its online grocery delivery service that soft-launched in November. The service is currently only available to employees. It is apparently also testing "open-box delivery" -- a service that allows customers to check the products at their doorstep before deciding whether to buy them. This will be the second attempt by Flipkart to enter the grocery segment after its earlier foray failed in 2016.

Alibaba-backed Paytm is also reportedly exploring integrating its e-commerce arm Paytm Mall with grocery and consumer goods services. Amazon, meanwhile, is considering bringing its AmazonFresh model of grocery delivery to India, after trying out two other services there: Amazon Now (recently renamed Prime Now), in which large partner stores such as Hypercity and Big Bazaar fill fresh food orders, and Amazon Pantry, where local shops fill orders for daily necessities like detergent and cosmetics.

Local brick-and-mortar retailers such as Godrej Nature’s Basket and Big Bazaar are pursuing a so-called omni-channel strategy, investing in physical stores as well as in online apps and delivery services.

Politics and pushback

Within weeks of its Flipkart acquisition, Walmart ran into opposition in India, which could have repercussions for the entire sector.  

Indian traders, workers and farmers have stepped up their campaign against the U.S. retailer’s proposed acquisition of Flipkart, demanding that the government stop the deal on the grounds that it will harm the nation’s economic and digital sovereignty and put millions of jobs at risk.

A statement issued by 100 organizations including online and offline vendors, traders organizations and workers unions blasted the proposed acquisition of Flipkart as "the latest step in a series of developments aimed at circumventing the existing [foreign direct investment] cap in multibrand retail." Allowing FDI in e-retail, the statement continued, would provide a "backdoor" for foreign players to enter India's multibrand retail sector.

At present, up to 51% FDI is allowed in the sector, subject to certain conditions -- one of which is that at least 30% of the value of procurement of manufactured and processed products purchased is sourced from Indian micro, small or midsize businesses.

However, the rules on FDI in online retail lack clarity, and traders have long sought an explicit e-commerce policy.

The ban on full foreign ownership of multibrand retailers has been far stricter on physical stores than in e-commerce, and has limited Walmart's ambitions.

Walmart has built a presence in India with its Best Price chain of stores. The U.S. retailer recently bought Flpikart for $16 billion. (Photo by Takaki Kashiwabara)

Walmart entered India in 2007 by setting up a joint venture with major domestic telecom company Bharti Enterprises to operate cash-and-carry chain Best Price. It later turned it into a wholly owned subsidiary, but has never succeeded in making the chain a nationwide household name.

How Prime Minister Narendra Modi’s government responds to these complaints will be closely watched, as mom and pop shop owners make up a major support base for political parties, including Modi’s Bharatiya Janata Party.  

With these challenges in mind, TRA Research’s Chandramouli says predictions of an online grocery revolution in India should be taken "with more than a pinch of salt." He expects slow and steady growth, rather than the 72% compound growth others foresee.

“These are challenges that are huge," Chandramouli said, referring to the need to change consumer mindsets, ensure fresh deliveries, and overcome logistics issues. “It may not grow to the extent that they are promising.”

Grofers' Dhindsa, however, is an optimist. He expects his company, with its revamped business model, to break even in the next three years. This is despite the monumental  hurdles that Indian cities can present for delivery-based companies like his.

"In some areas in Delhi, we deliver on e-rickshaws. In some areas, we cannot run commercial vehicles during the daytime, and some roads are too narrow for vans to go in. It is a very custom-built solution for Delhi."

Being able to solve these problem, Dhindsa believes, will give Grofers an edge.

"We have always believed that because there are difficulties in infrastructure, we have opportunities."

Nikkei Asian Review editor-at-large Ken Koyanagi in Mumbai and Nikkei staff writer Kiran Sharma in New Delhi contributed to this story.

 

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