Hype ? - about Hyperlocal Grocery

At around $350 billion, India is in the top grocery markets of the world. This is approximately 70% of the Indian retail business which is around $500 billion. Modern retail accounts for 10 - 20% of this pie. E-commerce or hyperlocals are obviously a tiny part of the pie just yet. Most companies, therefore, are still at a stage where they have to prove their business models and change consumer behaviour. These type of businesses are expected to reach around 2% of the grocery market by 2020, creating a potential market size of around $10 billion (Rs 60,000 crore).

The hyperlocal on demand grocery has mainly two models -
a) A large player like Big Basket offering localised services. Inventory is carried by the company.
b) An aggregator using the local retailers to source products and handling the delivery
c) An aggregator using local retailers to stock and deliver

It is a no-brainer that an aggregation model, as it is asset-light, is less capital-intensive than the inventory-led one. But having said that, there are merits and demerits in all models

Offline Grocery Stores
1) Offline grocery stores are still the preferred choice for customers with the touch & feel and human interaction.
2) These stores can deliver the products quickly and at times even I have experienced gratification in half an hour. This is far faster than the online grocer
3) Further more due to the physical presence of a retailer, there is a certain amount of trust.

Online Grocery Stores
1) Stocking of a large number of skus is difficult. A local mom and pop store can carry perhaps 2000 skus which is difficult to satisfy the needs of all customers in a particular area.
2) With increasing rental costs, offline grocery stores are becoming difficult to manage.
3) Many customers are also familiar with the regular products they buy and hence will not have any hesitancy in buying online negating the impact of touch and feel to a large extent.

The Issues with Hyperlocal

1) Effective Margins - Having said that product based models earn 2-20% margins depending on the category. And there in lies the problem. The selling point for e-grocery is that it offers more convenience than the neighbourhood store; but to be sustainable they have to do this cost-effectively. And that is not the easiest job to pull off.

2) Managing Inventory and delivery - Normally e-commerce works with a delivery promise of a certain number of days however with grocery it has to be within a few hours if not immediate. Indians like to be serviced so they need the product to be delivered to their door step. (Internationally, pick-up-point-based delivery models are popular). The key reason is that customers order groceries online to avoid the hassle of going to the store, and a pick-up will undermine the convenience factor. So a fresh delivery infrastructure has to be created which is different from the existing e-commerce one.
3) Typically people go to the supermarket for their monthly purchase and then do tops ups from the local mom and pop stores on when it is required basis. And the local kirana is just a call away.
4) Additionally there is a monthly credit and
5) Delivery is done within an hour.
6) The lack of 'touch and feel' in the case of online perishables are pre-packed,
7) Moreover there is always "I can return it" if I don't like it.
8) Scaling up - One of the key issues with online hyperlocal grocery is that it is a locality-specific operation. Every time you add a new locality it is similar to launching the business afresh. This makes grocery a more difficult and challenging business to multiply

Arguably and for good reason margins can be improved. For example:
a) Offer premium products like imported products
b) Increase the basket size
c) Smart sourcing
d) Increase perishables but then again stocking is a big issue.
e) Open offline depots like Grofers

Even with all the pluses I am not convinced whether all hyperlocal operations are viable.

The basic issues are:

1) Can they generate more revenue per order from customer than the cost of delivering one order? From personal experience it seems these hyperlocal grocers are incurring huge costs in delivering an order as compared to the revenues being generated by an order making it unviable. Even at Rs 20 delivery cost per order that means in a Rs 200 order it is 10%. There is a certain ceiling on how more the delivery team can be efficient.

2) Unlike other businesses customers want their orders delivered in half an hour but given the economies of (small) scale it is not possible.

3) Companies like Grofers are opening localised warehouses. Whilst margins will increase, there is a limitation on goods which can be stocked, costs like rentals, manpower etc. will add up significantly

My suggestion

I am inclined to go with an Aaramshop who follow a hybrid, asset-light aggregator business model. It fulfils orders with a retailer closest to the customer, who will deliver at the consumer's doorstep within a couple of hours of placing an order. This way the cost of delivery is with the retailer. For a small transaction fee (around 0.2%) plus value adds of inventory management, integrated sourcing, analytics, promotional revenue etc.

For high transaction stores I would even partially reimburse the costs of the delivery boys thereby tying in the retailer to the platform.