Traditional trade share in grocery retail to fall 20% in next 5 years: McKinsey

As India’s grocery retail market expands, the share of traditional trade will decline, a new report said, with modern trade formats and pure-play online sales capturing a bigger share by 2025.

Estimates by consulting firm McKinsey & Co. suggest that the share of traditional retail will decline from 85% now to 65-70% over the next four to five years, while other channels, including e-commerce and modern trade retailers, could corner 30% share.

The overall grocery retail market is expected to grow 6-7% annually by 2025. “We expect the overall grocery retail market to grow in the next 10 years; it will only grow in size. So, in terms of size, traditional trade will still be bigger; but from a share perspective, it will come down,” Abhishek Malhotra, partner, McKinsey & Co. said.

The segment will see a greater share of the grocery market tilt towards modern trade players such as Reliance Retail, DMart and More, while also significantly benefiting online grocers such as BigBasket and Blinkit.

In the new market share equation, McKinsey sees digital players capturing a larger share. “That’s because consumers have shifted, which was a covid phenomenon. The second thing, I think, we see is massive expansions by (e-commerce) companies,” Malhotra told Mint.

India’s grocery retail market is vastly unorganized and complex, comprising an estimated 12 million retail outlets, and over a million wholesalers and distributors of large FMCG companies delivering goods of daily use to end consumers.

However, entry of cash-and-carry companies such as Walmart and Metro Cash & Carry over the last decade, the advent of e-commerce and, more recently, the growth in new-age B2B providers has transformed this ecosystem, McKinsey’s “State of Grocery Retail in India” report said.

As market dynamics shift, consumer product companies will have to work on strengthening their core distribution as well as work on new emerging channels amid a strong consumer shift in preferences as well as a slip in the dominance of traditional retailing, McKinsey said.

The report comes as the pandemic has driven up digitization and prompted both companies and consumers to experiment with newer formats.

Companies, for instance, have been working with eB2B players, while more consumers have switched to shopping online for groceries.

McKinsey’s internal estimates from October 2021 suggest that more than 60% consumers in India used omnichannel for purchases in all categories, a number that was as high as 68% for the grocery category.

Meanwhile, companies have also been on an expansion spree—the past year has seen the emergence of new models such as quick commerce platform Zepto. In December, Swiggy said it will invest $700 million in its express grocery delivery service Instamart to scale up its non-food delivery categories.

Grocery delivery service Grofers re-branded as Blinkit, promising quick delivery in select cities. This week, Flipkart announced the expansion of its grocery services to 1,800 cities across India.

However, the report flagged issues linked to profitability among online grocers.

“Such platforms focus on growing their gross merchandise value (GMV) to offset high operating costs, investments in delivery infrastructure and, often, the customer’s reluctance to pay for deliveries. Most leading players have a negative Ebitda, while offline grocers typically have an Ebitda of 5-8%,” it said.

Malhotra said profitability could be at least two to three years out. “Right now, it’s a customer acquisition game,” he said.

The shifting landscape has also led to channel conflict as traditional distributors rebel against new, emerging distribution platforms such as JioMart, Walmart, Metro Cash and Carry, Booker, Elasticrun and Udaan.

Last month, industry body All-India Consumer Products Distributors Federation or AICPDF said FMCG companies offer better deals and margins to new-age distributors which in turn helps such platforms provide cheaper products to end retailers.

The industry body promised to boycott products of companies in some cities if their demands were not met. For now, the matter seems to have been resolved.

Malhotra pointed to a short-term pains as newer channels grow.

“As this channel comes up, we will see some balance come up. I think the balance will be in what products are available through one channel versus the other,” he said.