A hotbed of innovation - PDF

News from
July 2015
E-Grocery
A hotbed of
innovation
E-grocery is spawning new models of supply chain and distribution
thanks to the urbanisation trends and a growing demand for lower
costs and greater convenience
By Alagu Balaraman
G
oing shopping for groceries in India used to be a family outing, but this is now steadily changing. Work hours
are extending. Urban traffic and parking have become a challenge. Children have much busier schedules. So,
there is an increasing set of shoppers who see grocery shopping as a necessary but not an enjoyable task, and
are open to options providing greater convenience and lower prices. This is where the Internet has come in to allow some
enterprising start-ups create a new business model based on very high levels of service and lower cost. McKinsey Global
Institute has forecasted that urbanisation trends will create thirteen additional megacities in India by 2025. So, it seems
that the demand for convenience is likely to spread wider as urban India congests its way forward. In this, e-grocery will
be a field of rapid innovation fuelled by an intense focus on customers and their needs.
Other than customers, e-grocery has also caught the fancy of investors. As a nascent industry, e-grocery still requires
funding to survive and grow. So, while there are examples of companies that bootstrapped with minimal funds, to grow
in scale they need a serious infusion of funds. The funds are typically required to support three areas – the technology to
make it happen, discounting as all retail does at times, and very importantly, into the supply chain infrastructure. Let’s
take a closer look into what happens in the supply chain and how it can make or break an e-grocer. As we shall see, there
has been a lot of innovation going on here and the jury is still out on the winning model.
The most significant innovations have been in marketing and delivery. The two are closely linked with each other,
far more so than in traditional retail. Delivery has occupied a huge mind share of the industry. After all, the main promise
is one of convenience. So, all models of e-grocery have the challenge of delivering on time and the complete order. The
delivery problem in India is quite unique- cramped roads, collection of cash on delivery, low levels of education among
people hired for the front line and high attrition. And, of course, incredibly low margins. Unique models are required if
an e-grocer is to survive and grow sustainably in conditions such as these.
Delivering on time a complete order creates a powerful brand for an e-grocer. Consistent performance builds trust
among customers and has led to the concept of time slots for delivery. Anyone who has waited at home for a critical
courier or a passport delivery will know the value of being able to specify the time slot in which delivery will happen. It’s
not just about convenience for the customer. By bringing precision into delivery, e-grocers can increase margins. A locked
door means wasted money and a dissatisfied customer. Moreover, if a delivery is delayed, the customer might not be able
to wait. So, she may have already picked up those essential ingredients for the dinner she had planned.
Precision in delivery also allows for other efficiency mechanisms. The clockwork precision needs to go back all the
way to the stocking policies, picking process and routing of delivery vehicles. Improvements in each of these areas bring
in efficiencies. For example, if pick-up is rapid and efficient, the space needed in warehouses is less than the retail space
needed for customers to browse in. Warehouses are anyway located in lower cost locations than retails stores. Secondly,
delivery routing can make use of techniques like milk runs that increase vehicle utilisation and lower total cost.
Marketing has become truly one-to-one with e-grocers. Each customer can experience a customised offering, as
e-grocers have started serving web pages specific to the customer based on past buying behaviour. So, a premium customer
might see premium products on the first page, whereas a budget customer might see great value deals. The added
convenience of stored shopping lists helps overcome items that have been forgotten and having someone from home dash
to the corner store to pick it up. Th is is an added convenience for a customer and a plugged source of revenue leakage
for the e-grocer. Finally, with orders in hand, e-grocers do not need surrogate measures for lost sales. It stares them in the
face, when the delivery happens and the customer points out that something is missing.
With the move to mobile applications, the customer can really buy what they want anywhere they want. Since all
the customer specific data is stored centrally, it is possible for a customer to order from the PC at home, at work, in a
friend’s house or from a mobile. Across all these devices, automated systems will do a more effective job of cross-selling
and up-selling than can be expected on ground by staff in retail outlets. Technology is evolving at an incredibly rapid
pace and e-grocers will tap into this change. The gap in the pace of change between e-grocers and their traditional rivals
will widen.
In such a dynamic industry it would be strange if everyone agreed on the way ahead. The e-grocery business is
no different. Even as companies look to overcome the common challenges,
they are taking different routes. The most fundamental difference is the basic
model of e-retailing itself, the choice between the inventory based model and
A complete on time order
the marketplace based model. In the former, the e-grocer buys stock and sells
creates a powerful brand
for an e-grocer. Consistent
it, just like a regular retailer. The difference is that there are no retail stores
performance builds trust
and no front line staff , two areas that occupy a lot of time and funds of the
among customers and
traditional retailers. The best known example of this model is Bigbasket.com.
has led to the concept of
In the marketplace model, an e-grocer connects customers with regular kirana
time slots for delivery.
and other stores in the neighbourhood. It (e-grocer) books the order and has
Anyone who has waited
delivery men who pick up the goods from the kirana store and delivers it to
at home for a critical
customers. PepperTap.com and Aramshop.com use this model. On the other
courier or a passport
hand, LocalBanya.com uses a mixed model, partly inventory-led and partly
delivery will know the value
JIT (just in time), where it sources slow moving items the evening before.
of being able to specify
the time slot in which
In our view, the two base models, inventory-led and marketplace, will
delivery will happen
service completely different needs. The mainstay will be the inventory-led
model. The reasons for this are buying power, scale and process capability. The
traditional tug of war between brand owners and retail will play itself out in
the e-grocer space as well. As e-grocery scales, the pressure to increase margin by capturing value addition will lead to store
brands. The share of space and the discounting of store brands can be expected to increase. As scale increases, the discount
e-grocers can demand from manufacturers will increase. Th is is possible only if there is consolidated buying, which is not
an option for the marketplace model. Scale of operations will lead to investment in automation, and the optimisation
of handling and delivery models. Th is requires centralised planning and execution, which is also not possible with a
distributed model. Th is inability to scale is particularly the case when it comes to quality processes that are essential to
fresh products. Finally, the investments mentioned will help the inventory-led model to consistently increase operational
consistency, a vital factor in customer satisfaction. The marketplace model, with its intensely manpower dependent
operations models will not be able to scale as effectively. The difference in experience can be seen in the difference in
trying to book a hotel room online versus booking a fl at through Airbnb.
So while inventory-led models can work well with scale, they will not do so well with highly specialised needs.
The technology can handle the long tail of specialised requirements, but inventory-led models will find it hard to deal
with large numbers of very small and unpredictable requirements. They will be limited by a combination of traffic and
congestion, as well as the fact that their core business itself is so big and growing that they will ignore these less scalable
areas. Th is will be addressed by marketplace models. Another area where marketplace models are likely to score will be for
small volume, urgent requirements. Scale makes it difficult to deal with the tiny but urgent requirements. So, a rush order
in 2-3 hours might be something that a marketplace model can make high margins from, but will mess up a mainstream
e-grocer. It is likely we will see these models diverge and settle into different spaces, just as Amazon and eBay occupy
different spaces.
Now one must remember that these are conjectures. Educated guesses will still be guesses. If armchair predictions
were so accurate there would be many more successful start-ups. The reality is much harder to work through, as every idea
requires weeks and months of execution. So, the e-grocery industry segment is bound to have new twists and turns as it
innovates and executes its way forward. So, a final word of advice, watch this space closely. PG
The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd