Why Grocery Delivery Is An Incredibly Challenging Venture

It is no secret that the current coronavirus pandemic has put entire business communities all around the world in complete conundrum. Most business models do not make sense anymore if people are stuck at home, or even practicing social distancing. And with assumptions of such conditions to be lasting for at least the next 1.5 – 2 years, many entrepreneurs are trying to make a hard pivot towards one of the few business models that do work in the present scenario. Because they know that otherwise they may go out of business.

One of such verticals that has attracted enormous attention right now in Bangladesh is grocery delivery. With most people staying at home, demand for home delivery of groceries has skyrocketed. Previously, this market had very few players with Chaldal perhaps being the most notable. But within a month, we have seen the emergence of at least 20 new ventures in this space. In some cases, existing startups simply added grocery delivery to their offerings (Sindabad, Foodpanda, AjkerDeal, Sheba, Daraz, Pathao etc.). In other cases, completely new entities have been opened (Jogaan, Deshibazaar, Mudikhana etc.).

But there are several problems in rushing into the grocery delivery vertical without a clear understanding of the challenges involved in this particular business model. In a nutshell, grocery delivery is one of the most difficult of business models in the world. Tons of startups around the globe, armed with hundreds of millions of dollars in investments, have so far fought unsuccessfully in making this business work. Because there are some inherent limitations that make grocery delivery a very tough nut to crack. This is not a market that you wade into just to make a quick buck for a short period. Succeeding in this model entails a mammoth commitment of at least 10-15 years while battling thousands of obstacles to even hope of turning into a profitable business one day.

Below in details, let us explore some of these challenges:

1) Wafer-thin margins

Some people hear that a kg of potato that sells for BDT 25 in retail markets was sold by the producing farmer for BDT 8. They immediately theorize that there must be windfall profits to make in this sector. Unfortunately, that is furthest from the truth. Transport, labour, spoilage, storage etc. can add significant costs along the journey to retailers. In the end, a retailer can count only 8-10% margin for most grocery items.

If you are managing inventories yourself, you will have to play with those margins while managing the huge costs of warehouses, cold storage, delivery vehicles, marketing and promotions, tech infrastructure etc. If your grocery delivery model is to simply source the items from a retailer and charging him commissions, you won’t be able to charge a lot because the retailer is not making much to begin with.

Consequently, global grocery delivery startups typically have to work with a meager profit margin of 1-5%, which gets eroded to negative levels when they have to splurge on discounts and price wars to fight competition. Such a margin thus makes it an extremely difficult business to sustain in the long run.

2) The cargo space dilemma

Imagine you have a venture selling electronic gadgets online. Someone orders a phone costing BDT 30,000. A phone box is a small item. With a booming business, you can easily buy a bicycle for BDT 10,000 and hire a deliveryman to manage the deliveries. The investment you had to make is small. And if you are netting BDT 3,000 on that phone, it’s a tidy utilization of that investment.

Now imagine you are running an online grocery business. Someone places an order for 10 kg potato, 10 kg rice, 5 kg onions, 5 kg tomatoes and 10 liter soyabean oil. The ticket size would be just over BDT 2,000 here. But you can obviously not deliver so many items that take up so much space using a bicycle, or even a motorcycle. Most likely, you will need a covered delivery van. A 1-ton van can cost you around BDT 9 lakh.

Imagine the delta in investment needs! BDT 10k to deliver phones, and BDT 9 lakh to deliver rice and onions! And with a van, there are tons of other costs to consider too, such as the salary of the driver which would be much higher than what you would pay to a bicycle rider, oil, registration and fitness renewal fees, maintenance costs etc.

The argument here one might make is that the volume of orders for groceries in a day would be much higher than that of a pricey high involvement item like a phone. However, even in such a scenario, the math does not make much sense. Even if you can make 15 deliveries a day, which is challenging in itself using a covered van because of the terrible general traffic in Dhaka, at BDT 2k per delivery, the total amount you sell in a day is just BDT 30k. Which is the same as selling just one mid-range phone using a bicycle!

Important to note that the average ticket size per delivery in Dhaka is BDT 1,300 pre-pandemic according to Chaldal.

Also consider the number of delivery vans you will need if you want to deliver hundreds of orders in a given day. The upfront investment and running costs in managing such vans against selling such low value items is a very important question to consider.

Even if you were able to fit some of the orders in a delivery box mounted on a motorcycle, you would still have to make two trips per delivery (first going to the store or warehouse to stock up, then dropping off at the customer’s house) whereas if you were to deliver items like gadgets, shoes etc. you can just stock up in the morning once and then deliver them throughout the day.

On a sidenote, grocery startups which are having a great time delivering under the current situation should be wary about traffic returning to Dhaka when the pandemic hopefully subsides, and how it can eat into their unit economics as demonstrated above.

3) Customers unwilling to pay for convenience

One of the biggest complaints by grocery startups around the globe, and especially in our part of the world, is that customers in general don’t like to pay for deliveries. When it comes to online shopping, we have become habituated with being offered free deliveries to the point that we have taken it for granted. Now this works when the venture is selling relatively high margin items, like apparel, cosmetics, furniture etc. But when it comes to low margin products whose ticket price is also very low, not being able to charge for deliveries is a huge problem.

Customers are so sensitive to delivery charges that they will even look around multiple options before finding one that isn’t charging any. Consequently, startups are forced to offer free deliveries or risk losing clients.

Navneet Singh, CEO and co-founder of PepperTap, which was the third largest grocery delivery startup in India (with USD 50 million in raised capital) before it exited the business in 2016, cited this issue as one of the chief reasons why this vertical isn't working in India.

In Bangladesh, most of the grocery startups are also offering free deliveries. Which means they are having to absorb the cost of deliveries themselves, on top of having to already deal with tiny profit margins. The market leader Chaldal, while not doing so, is still charging a meager BDT 25-30 per delivery, which is barely enough to cover delivery costs using vans.

According to a study by Capgemini Research Institute, only 1% of customers are willing to cover the full cost of delivery when it comes to groceries.

4) Retailers’ abuse of discounts

Suppose you are a retailer and you buy milk for just 5% less than what you sell them for. Suddenly, you find an online grocery startup offering 15% discount on milk. What do you do? Still buy from your usual supplier, or capitalize on the discount to stock up on milk for your customers? You easily make 10% more now if you do the latter.

This is a perennial problem faced by grocery delivery startups when they run discount schemes for their customers. Instead of these discounts benefiting the end consumer, they are snapped up by retailers looking for a bargain. Waseem Alim, CEO of Chaldal, himself talked about this frustrating challenge in an interview with Future Startup.

Such a phenomenon makes it even more difficult for grocery startups to market their services and entice customers to choose them over local stores.

5) Lack of customer loyalty

The grocery delivery business is a commodity business. A commodity business is defined as a business where all the competitors have the same indistinguishable offering. It is thus incredibly difficult to stand out in such markets, and often it just comes down to who spends more in marketing.

Commodity businesses often suffer from a lack of customer loyalty, and the grocery delivery vertical is no different. A customer does not really care which startup he is ordering from. All he cares about is how much it costs him. So often it comes down to which brand is offering more discount. The customer will just keep shifting from one option to another depending on where he is getting more discounts. This degenerates the entire industry into cutthroat discounting and price wars. Which of course, as we discussed earlier, the retailers take advantage of. It keeps fueling a toxic chain of events.

6) Scalability issues outside of metropolitan areas

Urban, dense, relatively prosperous cities can have significant demand for online grocery delivery, because people are busy and pressed for time. In the current pandemic situation, people in such regions will also be more inclined to remain indoors to stay safe, thus driving growth of this vertical.

However, in the less urban areas, the situation is quite different. Firstly, the distance between individual homes and grocery stores is significantly higher in such towns, decreasing the efficiency of delivery systems (more time consumed in delivering goods). Secondly, many of such stores do not have a rich list of items in stock, which can mean that a deliveryman will have to waste time shopping around multiple stores to find all the items ordered. Thirdly, the entertainment-starved populace in such places actually treat grocery shopping as an enjoyable pastime, and are thus less inclined to order from online startups. Fourthly, many of these shoppers enjoy credits when shopping from their neighbourhood stores, which is an advantage they won’t get with online shops. Fifthly, internet connectivity is poor in many such towns making the adoption of online habits difficult. Lastly, people in such regions are less worried about the pandemic, and thus not motivated to stay indoors.

Therefore, once Dhaka becomes saturated, most grocery startups will have a big challenge scaling to other parts of the country. If lessons are to be learned, we can simply look at India. There, some of the biggest grocery delivery startups, including PepperTap and Grofers (raised USD 166 million), first expanded to tier two and tier three cities before scaling back precisely because of these problems.

7) An intensely technology driven sector

While grocery delivery may seem simple from the outset, it is actually an incredibly complex venture requiring a high level of tech infrastructure within the firm. You need to vigorously collect, crunch and infer upon data to optimize delivery routes, increase efficiency, project demand of goods across different regions, plan upon fluctuating prices, manage inventories etc. Since the sector is suffering from negative margins across the world, it is theorized that the eureka moment of significant profitability can only come from even greater technological breakthroughs down the line, with autonomous vehicles and drones some of the touted future solutions. So companies involved in this space have to own an incredibly strong tech setup, involving specialists like data scientists. Not only does this increase operational costs even further, but in a country like ours, such a setup is easier said than done.

In summary, what budding entrepreneurs interested to work in this sector should know is that the grocery delivery vertical is not a startup you get into via a knee-jerk reaction to a changing climate. While demand for this service is quite high right now, it may soon decrease considerably in the next 1.5-2 years if the pandemic hopefully subsides. And after it does, you will have to manage the incredibly challenging task of achieving meaningful profits in a field where almost no one else has succeeded so far. And that might take at least 10-15 years of sustained, focused, intense efforts. So do consider whether you are ready for such a long-term commitment before jumping in.

About Me: I am a co-founder of a young food venture, Alpha Catering. My passions include digital marketing, personal development, reading, writing, and entrepreneurship. At Alpha, we are striving to change the perception of catering in Bangladesh through tech, innovation and awesome customer experiences.

Link to our FB page: https://www.facebook.com/alphacateringservices