Bengaluru: Even as Chinese e-commerce giant Alibaba Group Holding Ltd nears a deal to invest in BigBasket, the largest Indian online groceries start-up is set to face its toughest test with the expansion of Amazon India and the launch of Flipkart’s grocery business later this year.

According to experts tracking Indian e-commerce, online grocery sales have taken off slowly and grown sluggishly, and is forecast to barely reach $1 billion in 2017, according to market research firm RedSeer Consulting Pvt. Ltd. But given the high order volumes and repeat purchases of groceries, the sector is expected to be a key battleground for online retailers; the largest internet investors in India are betting that online groceries will turn into a multibillion-dollar category over the next three to five years.

“The online grocery space will be a big battleground in the near future—and given the high volumes of orders and repeat purchases in this space, it doesn’t make sense for any top online retailer not to have a presence in groceries," said a partner at a top venture capital firm, which has a corpus of about $100 million. He requested anonymity.

In a report last week, RedSeer said that while 2016 was a challenging year for the online grocery segment, sales are likely to rebound by the end of 2017.

“After a challenging 2016 year, 2017 is on track to be a robust year for E-FMCG/Grocery market with 60% y-o-y growth likely. Sales have been driven largely by volume growth—which points to growing acceptance and penetration of online grocery among consumers. Additionally, AOV growth has also been significant, driven by increased share of cosmetics and other premium products in shopping basket," said RedSeer.

FMCG is short for fast-moving consumer goods, jargon for products such as soaps and shampoos that sell quickly. AOV stands for average order value.

Despite the fact that the online grocery space has been slow to take off, India’s largest online retailers Amazon India and Flipkart are ramping up their plans for the sector. While Amazon India is already present in the consumer goods business, Flipkart is preparing to launch the grocery offering by the end of the year, after delaying it due to preparations for its flagship festive season sale, Big Billion Days.

During recent interviews and conversations, top executives at Flipkart indicated that the firm’s approach to groceries will be somewhat similar to that of BigBasket—and different from the strategy adopted by arch-rival Amazon. While Amazon offers a two-hour delivery service through its Amazon Now mobile app and encourages customers to buy staples on its platform as and when they need them, BigBasket encourages its customers to stock up on their weekly or monthly purchases at one go. Flipkart is attempting to replicate the latter approach and may launch a private label for groceries like BigBasket, according to two executives aware of the online retailer’s plans.

In February, Mint had first reported that Flipkart CEO Kalyan Krishnamurthy was betting big on groceries, hoping that sales of everyday household items will keep shoppers coming back to the company’s platform. As part of this plan, Krishnamurthy brought back two executives, Manish Kumar and Nitin Rajput, to help launch the new category.

Separately, BigBasket is currently in talks to raise roughly $200-300 million from Alibaba and digital payments start-up Paytm, even as it prepares to fight Amazon and Flipkart, according to two people aware of the discussions.

A Flipkart spokesperson declined to comment on the online retailer’s plans for the launch of its grocery business.

An Amazon India spokesperson said the company will continue to increase the number of products available on its platform. “We aim to be the ‘everything’ store—where customers can find any and all products that they are looking for," she said.

BigBasket co-founder and CEO Hari Menon did not respond to an email seeking comment on the latest fundraising talks.

In a July interview, Amazon India’s head of consumables business, Saurabh Srivastava, had indicated that the company would invest heavily in the sector and launch in more cities over the coming months.

“The food ecosystem needs investment, technology and infrastructure—and since the government was interested in making sure that companies come in and invest in (building) that, we believe that there is value that we can add as a strong technology company," Srivastava had said.

While investment in online groceries is one thing, making money from the business is another thing altogether.

“It’s very hard to make money in groceries, even with a private label approach like BigBasket. For any retailer to succeed in this space will require consistent investment and growth for a 5-10 year time frame," said the venture capitalist cited earlier.

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