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A file photo of Tata group headquarters. Mint
A file photo of Tata group headquarters. Mint

Tatas look for foothold in cut-throat online grocery retail market

  • Investments earmarked for online grocery may well help drive value for the Tata group

While competition in the Indian online grocery retailing market has been growing for some time, 2020 has brought with it a renewed intensity. First, Reliance Retail launched its JioMart venture. Now, news reports suggest the Tata group is in talks to buy a stake in online grocer BigBasket.

The salt-to-software conglomerate’s rush to place a bet on India’s vast online market is understandable. Reliance’s moves in this space, coupled with its superapp ambitions, have helped it raise billions of dollars from overseas investors. The Tata group, too, has superapp ambitions, and online grocery will be an important piece in this puzzle.

Having said that, on a standalone basis, the online grocery business may prove to be a tough nut to crack, given the stiff competition and the fact that profit margins are wafer-thin. “A lot of times, companies look at the competition and want to emulate them. Although the fact remains that in the online market, beating Amazon looks like a tall order," said Varun Singh, an analyst at IDBI Capital Markets and Securities Ltd.

“Even as the massive size of the Indian online grocery retailing market is a magnet, it is also the toughest in terms of making money. The challenges for e-commerce still include low per capita income, which has meant that scaling up is always challenging. At the bottom of the pyramid, the value of the ticket size is low," said Govind Shrikhande, a former managing director of Shoppers Stop and a veteran of the retail industry.

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He also points out that the Tata group has struggled in the offline grocery retail space through its Star Bazaar offering, despite its partnership with Tesco. To its credit, the group has done far better in the fashion retail category, with Westside.

Online grocery, in particular, appears to be a tougher business. “Online grocery is a hard category to make the economics work. The supply-side gross margins are low, supply chain and delivery costs are high, and unit order sizes vary. Further, customer acquisition costs online can be high if the marketing mix isn’t efficient," says Rachit Mathur, managing director and partner at Boston Consulting Group. It’s also important to note that Avenue Supermarts Ltd, which has had great success in offline retail, has been cautious about jumping on to the online bandwagon. Avenue runs D-Mart stores.

Having said all this, the lure of the Indian retail market can’t be wished away. For those with the right business model, there may be much money to be made.

“BCG estimates India’s grocery market at about $0.5 trillion and expected to double in the coming decade. Modern retail and e-commerce share at present is <5% and expected to be 20%+ over the same period depending on supply-side investment and actions. This channel shift will lead to potentially $200 billion-plus of market opportunities," said Mathur.

Plus, the pandemic has accelerated growth. “The pandemic has accelerated the shift to online grocery with penetration increasing from 0.3% in 2019 to 0.6% in 2020. The size itself has doubled, and incremental users have driven GMV (gross merchandise value) growth," said Rohan Agarwal, director at research firm RedSeer Consulting.

While user acquisition has accelerated due to covid, even the ticket size of orders has increased for existing users.

“There will be consumer stickiness as and when covid starts to wear off. That’s because consumer confidence has been dented, and they would be cautious even after a vaccine is out. So a lot of changes in terms of increase in online shopping seen during covid are for long-term," said Harsha Razdan, partner and head, consumer markets and internet business at KPMG in India.

But with the likes of Reliance and Amazon in the fray, it’s clear that large investments will be necessary to sustain in the long term. The fact that regulations tend to suit domestic firms will come to the aid of Tata, though that alone is no guarantee of success.

The additional advantage for the group is its presence across a vast number of consumer-facing industries makes it a good candidate to create a superapp and capitalise on the customer base of its various group companies.

In that backdrop, investments earmarked for online grocery may well help drive value for the group. “The success of the online format, including grocery, is about building an efficient supply chain and having a loyal base of customers. Also, while online grocery remains a difficult business, it makes sense to consider buying a stake in existing players instead of building a new one," says Razdan.

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