9 min read.Updated: 27 Oct 2020, 08:27 AM ISTMihir Dalal
Strong demand online for food and grocery during Diwali affirms the post-pandemic growth of this category
In Indian e-commerce, the Diwali shopping sale is the most important period of the year, the equivalent of the Black Friday sale.
Since 2014, every year, Amazon and Flipkart, which together dominate the e-commerce market, have held heavily advertised sales events in this period, which typically starts four weeks before Diwali and ends a few days before the day of the festival. Huge discounts are offered on mobile phones, electronics and fashion, three categories that together account for more than 90% of all spending online in the period.
Sales of food and grocery products, however, languish. Last year, for instance, online retailers (mostly Amazon and Flipkart) raked in nearly $4 billion during the festive season, accounting for about 14% of annual e-commerce, according to data with RedSeer Consulting. Only about 3% of the e-commerce festive shopping in 2019 was on groceries.
This year though, with the pandemic having turbocharged the expansion of e-groceries, the category is set to increase its share of the festive season spending. “The Diwali sale used to be a nice-to-have event for us in previous years, but this year, we’re starting to see a surge in sales, and we are needing to prepare our partners, warehouses, delivery executives to make preparations for the event," said Albinder Dhindsa, chief executive officer of Grofers, the second largest e-groceries app.
“People are mostly going to be at home this Diwali; they won’t be going out to meet relatives, they won’t be travelling, there will be very little mingling socially – at least that’s the hope. Groceries has definitely become more of a focus in this season for all online players," Dhindsa said.
Online shopping patterns differ hugely from the way people shop offline. Mobile phone sales, which constitute a very small part of overall retail spending, have comprised as much as 40 to 50% of all e-commerce. The food and grocery category, which is easily the biggest in the overall retail space, has been almost irrelevant within e-commerce, comprising less than 5% of online spending in most years. That’s changing.
After the novel coronavirus outbreak started in March, the fear of transmission and chaotic lockdowns had compelled millions of customers in urban India to shop online for food and grocery products. E-grocery firms feared that this bump in sales would vanish after lockdowns ended and cities started reopening. But seven months into the pandemic, the online grocery boom has sustained. Many people are still avoiding stores, while the low prices on online platform seem particularly attractive amid the economic slowdown.
In short, the e-grocery category is gradually coming of age after being on the periphery of the e-commerce market for a decade. It’s not just Grofers and bigger rival BigBasket that are registering a consistent increase in sales every month. The grocery businesses of Amazon and Flipkart are flourishing like never before.
With the entry of Reliance Industries’ JioMart earlier this year, it sets up the stage for what may turn out to be the most important battle in India’s $800-850 billion retail market. The e-grocery market will expand to $3 billion this year from $1.9 billion in 2019, and will exceed $18 billion by 2024, RedSeer estimates. The overall e-commerce market touched $27 billion last year.
However, while demand continues to be strong, many structural obstacles remain for the e-grocery category. Most of online grocery spending is concentrated in the top 6-8 cities; the cost of delivery outside these cities is still too high, and while companies are experimenting with different ideas, including tying up with kirana stores, no firm has worked out a viable business model yet.
The category offers wafer-thin margins, and as competition becomes more intense, firms will be forced to cut prices, further depressing margins. Analysts say that consolidation is inevitable after the pandemic ends.
RedSeer predicts that the e-grocery category will account for about 7% of this year’s festive shopping season, more than doubling last year’s share. According to estimates by another research and consultancy firm, Forrester Research, groceries are likely to account for 6% of spending in the ongoing festive season, up from 2-2.5% of spending in the 2019 festive period.
Both Flipkart and Amazon said that they are registering a sharp increase in demand for groceries during their respective sale events. New entrant JioMart, too, has seen a spike in orders this month on account of extensive advertising and deep discounts after growth had slowed in September. Grofers and BigBasket are holding multiple sales events, and both companies said they are registering higher growth than in previous years.
Saurabh Srivastava, director - category management at Amazon India, said that the consumables category was “one of the top new customer driving categories" and attracted a “significant number of new customers across the country" for Amazon during the Great Indian Festival sale this month.
Rajneesh Kumar, senior vice president and chief corporate affairs officer at Flipkart, said that the company expects grocery sales to go up by four times in this year’s Big Billion Days sale from last year’s levels. “Given the way the year has gone, we expect Diwali to be celebrated across households with necessary precautions. Hence we expect a huge demand for all in-home purposes, be it snacking, home cleaning & decoration, in-home cooking," Kumar said.
Higher retention rates
Apart from the addition of millions of new users, there are other encouraging signs for e-grocery firms. To start with, these users were added without needing to spend much on marketing (although advertising spending is gradually returning to old levels).
Average order values have increased significantly, up by more than 20% for BigBasket and more than 40% for Grofers from pre-covid-19 levels, which has brought down the relative cost of delivery. At both companies, the private brands business, which carries higher margins, is thriving, accounting for nearly 40% of sales. Most encouragingly, many customers who tried their services for the first time during the pandemic are sticking to them.
Seshu Kumar Tirumala, national head of buying and merchandising at BigBasket, said that the firm was seeing its highest-ever customer retention rates.
“Earlier, many customers would only come to shop during sale events for discounts; so they would shop on a Republic Day sale or Diwali sale and not shop again for a while. But for the past five months, our retention rates have gone up to 50% from less than 25% earlier," Tirumala said. A 50% retention rate in this case means that one out of two customers who shopped on BigBasket in a particular month used the service again the next month; taken on a quarterly basis, Tirumala said retention rates had risen to more than 70%.
In March and April, the supply chains of BigBasket and other online retailers were disrupted by the lockdown and labour shortages, even as they were overwhelmed by the flood of customers. Since then, these firms have invested tens of millions of dollars to improve their logistics infrastructure, which has led to more consistency in delivery times and higher customer satisfaction scores.
“The main factor behind the high retention is that many customers, who would have had doubts about the quality being good, or the order being delivered on time or refunds, etc–these customers end up being pleasantly surprised because their experience turns out to be good. Our delivery standards have actually gone up in the last few months and it’s showing in the retention rates," Tirumala said.
Grofers’ Dhindsa said more than 70% of customers who used the company’s service for the first time during the pandemic are still shopping on the app. Grofers has added more than 1.7 million new users since March. “Many of them would have otherwise gone to a supermarket. Many of them had never tried online grocery shopping before. The pandemic forced them to come online and they’ve found the experience to be good," he said.
Apart from the fear of transmission, the economic slowdown has increased the lure of e-grocers, which offer low prices through the year. “Because of income losses, many people are economising. That works in our favour as we cater to the value segment. In the initial weeks of the pandemic, online grocery was driven by accessibility. But there’s a shift. The salience of lower-priced alternatives has gone up. Value is becoming more and more of a driver. Larger pack sizes, lower prices in vogue. It looks like these trends are going to strengthen," Dhindsa said.
Presently, BigBasket is the clear market leader in e-grocery, followed by Grofers. Over the years, Flipkart and Amazon have experimented with different models in groceries, but they have been far less successful in this category than in others like apparel, electronics and books.
Flipkart sells groceries through its Supermart platform and its express delivery service Flipkart Quick, while Amazon offers grocery products through its Pantry offering, which is available in more than 300 cities, and Fresh, which is available in nine cities. Reliance’s JioMart has said it is present in more than 200 cities, but the availability and consistency of its service is still patchy in many markets.
JioMart is more of a direct rival to Grofers rather than BigBasket, which mostly caters to higher-income households. Still, so far, JioMart’s entry hasn’t significantly affected either firm’s business.
According to industry executives and analysts, JioMart has helped expand the market and attract new customers to the category rather than taking away market share from incumbents. Still in its early stages, JioMart’s service is not up to scratch in many markets, and Reliance is only gradually moving towards integrating its large offline retail business with its e-commerce offering. All of this limits its influence on the e-grocery market for now. “Flipkart has been trying to expand the groceries business for years, Amazon has been trying different models and now Reliance is trying its hand," said Satish Meena, senior forecast analyst, Forrester Research. “None of them is very strong in this space, and BigBasket and Grofers are ahead right now."
While BigBasket and Grofers seem unaffected by JioMart’s entry, that may change soon. The grocery category with its inherent low margins, supply chain complexities and massive size will require e-commerce firms to pump in tens of billions of dollars in capital over the coming years. Reliance, Flipkart and Amazon are all rapidly increasing their focus and investments. Others like D-Mart and the Tata Group are planning to enter. Despite the size of the grocery market and the low online penetration in the category, the e-grocery space could soon become crowded.
“None of Amazon, Flipkart and Reliance have a proper business model in groceries right now, but what they do have is massive capital. BigBasket and Grofers will have to keep raising capital to compete with them, and if investors are not willing to back them for many years, then they will be forced to consolidate. Rather than merging with each other, I would expect both companies to try and forge strategic partnerships with Amazon or Flipkart or Reliance because only consolidation will not help–finding capital is the key," Meena said.