India e-commerce: Grocery growth spurt

A fleet of electric trucks trundling across Bangalore hopes to quietly usher in a revolution. These vehicles, loaded down with fresh fruit and vegetables from local farms, and equipped with GPS and mobile internet, are the public face of the start-up FreshWorld.

Customers can sign up for notifications and be told down to the minute when the trucks will be in their area. The company's aim is to connect customers as closely to the farmers as possible, cutting out the intermediaries and grabbing their share of the economics for itself.

FreshWorld is one of a crop of Indian start-ups aiming to change the way the country shops for groceries. In many cities families rely on local markets to meet their food needs. But the selection at these stalls is often limited, and travelling to a larger hub to obtain harder-to-find ingredients is unrealistic. Along with this, getting the day's shopping done can mean a good deal of walking to different vendors.

Online grocery apps have sprung up to meet this need. They want to get fresh fruits and vegetables, along with various other products, into the hands of customers eager to do their daily shopping without leaving the house.

"The organized grocery retail segment is broken in India," says Rahul Chowdhri, a partner at Helion Venture Partners, who was involved in the firm's investment in BigBasket, one of these delivery start-ups. "For one thing, there are not enough organized players. For another, whoever is a player doesn't make money."

Given India's rapid adoption of smart phones, investors believe that tech-enabled players can attract consumers by offering the choices neighborhood markets cannot. Following BigBasket's $33 million round last September, provided by Helion and Zodius Capital, Sequoia Capital and Tiger Global Management invested $45 million to Grofers across two tranches this year. FreshWorld, meanwhile, got backing from the Indian Angel Network.

Mixed basket

The online grocery market offers as many business plans as there are start-ups. BigBasket maintains its own warehouses; ZopNow uses the warehouses of established supermarket chain HyperCity; Grofers has no storage facilities, instead delivering from local market stalls. Their areas of operation differ too: BigBasket and Grofers work across multiple cities, while smaller ventures are limited to a single city - FreshWorld, for instance, operates only in Bangalore.

This proliferation of business plans means that grocery start-ups must largely operate their own logistics infrastructure. They cannot use the same model as the established e-commerce outfits; books and DVDs can spend weeks in a warehouse and days in transit without hurting their quality. Fresh fruit, vegetables, meat and dairy, on the other hand, can only stay on the shelf for a few days, and once they are on the road they must be delivered within hours.

"If you want to build trust in the customer's mind, you definitely have to provide good quality fruits and vegetables," says Abhishek Rao, head of e-fulfillment at gourmet supermarket chain Nature's Basket. The chain, which is owned by the Godrej family conglomerate, now offers online ordering from its stores and delivery via its own fleet of motorbikes as well. "The customer really judges whether you have delivered good quality material or not. You cannot mess up in that area or they won't come back to you."

Companies have responded to these challenges in a number of ways. Grofers and FreshWorld, as mentioned, sidestep the storage issue - Grofers leaves that step to others to manage, while Freshworld eliminates the need for storage by shipping directly from farms. BigBasket is one of the few to tackle the warehouse requirement head-on by maintaining its own storage space.

In some ways, the logistics challenges faced by the grocery sector mirror those of India's larger e-commerce players when they were trying to establish themselves. With outside companies like DHL and India Post proving unreliable, online merchants built up their own services. Flipkart, for example, created Ekart to handle its deliveries. The need for reliable back-end services also gave rise to companies like Delhivery, which provides a variety of services, from last-mile delivery for larger companies to an end-to-end logistics platform for smaller ones.

"In more mature markets, like the US, when e-commerce took off, the logistics and supply chain were very well formed," says Aashish Bhinde, the executive director and head of digital and technology at Avendus Capital, which advised on Delhivery's recent Series D round, led by Tiger Global. "In India, you couldn't buy with that quick delivery at all. So this industry has been growing on the back of internal initiatives of people like Flipkart and third-party players like Delhivery."

Both the e-commerce companies and the grocery start-ups have required outside capital to grow their operations. The question for investors is how do they pick the right company to back?

"In a model which is globally successful - horizontal e-commerce - you have six large companies in this country. Grocery is an even more complex business," Helion's Chowdhri says. He adds that the wide assortment of business plans, and the early stage of the market, mean that investors with limited means have to take a flier on a company and see if its plan bears out.

Some investors have hedged their bets by providing capital to multiple companies. Sequoia, for example, balanced its investment in Grofers with commitments to several competitors, including Peppertap and TinyOwl. As competition winnows down the field, Sequoia can concentrate its attention on the companies that have staying power.

"There are diverging views as far as investors are concerned, which is good," Chowdhri adds. "It allows multiple companies to come about and try out. If we don't try, then we don't know which one will be the better model."

The winnowing process will mean casualties among those companies that choose the wrong path. Vishal Pereira, the managing director at CreedCap Asia Advisors, which advised on Freshworld's funding round in February, expects that of the 150 start-ups currently operating in the grocery space, only 20-30 will make it past the seed round. The rest will be left behind as the pace of innovation moves past them.

"In terms of utilization of manpower it's going to be very tricky," Pereira says. "When do you break even? When do you start making profits on that singular delivery guy?"

Big beasts

Existing start-ups face another major challenge as India's major e-commerce players size up the market and prepare to stake their own claims to online grocery consumers. Amazon has already arrived in the sector; the company launched its KiranaNow service earlier this year. The business model is similar to that of Grofers, linking customers with offerings from local neighborhood markets.

Snapdeal is also entering the fray. The e-commerce giant partnered with Nature's Basket earlier this year to sell the chain's inventory on Snapdeal's platform. Though neither Amazon nor Snapdeal is offering fresh meat, dairy or produce at this time, this could change as both players gain experience operating in the grocery sector.

"We definitely do see a potential for this sector, for this business, to come up in the next five years," says Rao of Nature's Basket. "By 2020, we expect our online sales of groceries to be almost the same as that of offline sales." Godrej believes its reputation and stability will be an asset as it enters the space - unlike the many newcomers in the sector, Godrej has operated in India for over a century.

Despite the challenges awaiting existing players, investors still believe in the promise of grocery start-ups. The computerized nature of the business means that companies have a database of what each customer buys and a record of what is being delivered to which locations. That presents attractive prospects for data mining.

There also exist opportunities for more old-fashioned kinds of synergy. Chowdhri points out that a truck bought to deliver food can be used to deliver anything that will fit inside it. Logistically, the cost is exactly the same. A company would be shortsighted to ignore the possibilities.

"That's a fully-fledged travel logistics that the company owns, going to a customer's house," he says. "We can use it as a platform to deliver many more things. Why only groceries?"

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• Topics
• Technology
• Consumer
• South Asia
• Venture
• Venture
• India
• Consumer
• TMT
• Logistics
• Helion Ventures
• Tiger Global Management
• Sequoia Capital