The Indian grocery market is currently a $400-$500 billion market, according to Ankur Pahwa, head of e-commerce and consumer internet at advisory services firm EY. However, says Pahwa, the penetration of e-commerce in this space is just 0.5% at the moment because of the supply chain challenges involved. Despite this, Pahwa predicts the share of online groceries will double by 2021.
With a multi-billion dollar opportunity waiting to be realised, the next wave of growth for e-commerce companies will likely be through your grocery cart. And the battle lines are already drawn. In addition to Amazon, online grocery players like Bigbasket and Grofers, and even food delivery company Swiggy and on-demand delivery service Dunzo are in the fray. All of them backed by deep-pocketed investors. Alibaba for Bigbasket, SoftBank for Grofers, and Naspers and Google backing Swiggy and Dunzo, respectively.
Walmart-owned Flipkart, India’s largest e-commerce firm, is no different. Already, the e-commerce giant has made its ambitions for its groceries arm ‘Supermart’ clear. Flipkart expects grocery to be one of its top categories in the next 3-5 years. To do this, it intends to expand the online-only Supermart stores beyond India’s major metros and into tier-II and -III cities in the coming years, says its grocery head Manish Kumar.
Flipkart started Supermart in 2017 after a short-lived hyperlocal grocery pilot in 2015. The service is now operational in five cities, primarily selling staples, packaged food, snacks and beverages. This, obviously, is a far cry from Amazon’s latest offering. Missing from Flipkart’s arsenal are fresh fruits, vegetables, meat and dairy products. To be a full-stack grocery provider, Flipkart needs to bridge this gap. Fresh food, after all, requires more frequent top-ups compared to, say, rice or pulses, which are typically monthly purchases.
Flipkart has been working to fix this. Over the last year, it’s been running a fruits and vegetables pilot in Hyderabad. This, according to an executive in its grocery segment, is to figure out the supply chain for perishables as well as understanding the customer demand for perishables.
But Flipkart doesn’t just want to play catch-up. It wants to leapfrog its rivals. The company has a hyperlocal pilot planned for December to see how it can extend its hyperlocal capabilities to deliver regular products from its site within a few hours as well, say two executives at Flipkart. This could be a potential game-changer, turning Flipkart from a laggard to a pioneer. This plan, however, hinges on groceries.
Flipkart’s plan to begin solving for a hyperlocal supply chain with groceries makes sense for two reasons. Groceries have a higher order frequency and a complex supply chain, making it the toughest to crack. If Flipkart can sort out its hyperlocal capabilities for grocery, it could potentially transpose this onto other categories like electronics or large appliances.
Flipkart’s seriousness can be seen in the person they’ve charged with figuring this out—Sandeep Karwa. According to a longtime executive at the company, Karwa, who has been with the company for over seven years, was critical to Flipkart’s success in its two biggest categories—mobile phones and large appliances.
But even as Flipkart draws up a masterplan, curiously absent from the picture is its parent company, Walmart. The American retail giant is yet to publicly announce any major plans for Flipkart’s grocery arm, focussing instead on its B2B (business-to-business) cash-and-carry stores.
Walmart, too, has hinted at the importance of kiranas (mom-and-pop stores). In a blog post about last mile delivery on 22 August, JP Suarez, senior VP at Walmart International said that small shops are vital to “get into communities we wouldn’t be able to otherwise.” And Walmart’s reported plans—like a potential $50 million investment in fresh produce supply chain startup NinjaCart and a possible partnership with the Tata Group—bear this out. Hyperlocal capability could be the last piece of the puzzle that merges the two seemingly disparate paths of Walmart and Flipkart.
The grocery struggle
The grocery business has not always been kind to Flipkart. Its first tryst with hyperlocal started in 2015 with a pilot called Nearby. The e-commerce giant teamed up with local kirana stores to deliver fresh produce in some areas of Bangalore. Four months in, the issue-plagued pilot was scrapped. Problems ranged from the quality of produce to fulfilment rate and crucially, inventory management, said an employee who was part of the pilot.
“This is a common misconception. Flipkart never had a play in the grocery category before Supermart. We did a pilot on hyperlocal delivery, learnt from it and built the new service by incorporating those learnings,” wrote Manish Kumar in an emailed response to The Ken.
Flipkart is hardly the only company to have teething troubles in the grocery space. Even pure-play online grocers like Grofers have had their struggles. To begin with, it is a low-margin business—typically hovering around 10-15%—since last-mile logistics eat into the margins. This is one reason companies are increasingly moving towards private labels, which allows for better control over inventory and cuts out middlemen, boosting margins by up to 30%.
The next challenge is the specialised supply chain, especially when perishables like fruits and vegetables are involved. These need to be stored and transported in temperature-controlled supply chains or ‘cold chains’ to ensure quality and freshness—an additional investment for e-commerce players. Finally, perishables are time-sensitive, and a strong last mile delivery fleet is essential to complete the hyperlocal machine.
Flipkart’s 2015 pilot opened its eyes to the challenges with groceries. “One of the first lessons we learned is that the supply chain for grocery is unlike any other, due to specific storage requirements etc.,” Kumar said. Apart from the supply chain, the recurring order rate for grocery is much higher than other categories. For instance, the fruits and vegetables pilot in Hyderabad clocks 100-400 orders a day, accounting for 5-25% of all grocery orders there, the Flipkart executive said.
Flipkart’s renewed grocery impetus is a marked u-turn from its stance in 2016. After a festival sale that year, then-CEO Binny Bansal took a shot at Amazon saying, “We did not sell ‘churan’ (digestives), ‘hing’ (asafoetida), detergent and products of daily need to make up the numbers. We sold real products like LEDs and smartphones that people love to buy during the festival season.”
By 2017, however, Flipkart rolled out Supermart. It now sells churan, hing and detergents along with other daily staples. But as of September 2019, Supermart is only in Bangalore, Chennai, Delhi, Hyderabad and Mumbai, despite having plans to expand to 5-6 other major cities by the end of 2018.
Cost, cost, cost
Flipkart’s trepidatious rollout of Supermart is deliberate. “We don’t want to rush into launching new cities every few months, but rather are focused on giving our customers the best in each of the five cities we are operational in, mastering the landscape of each city and then looking at the next step,” Kumar says.
While Flipkart gives the impression that it is playing the long game, Walmart’s acquisition of the company was also instrumental in making groceries a top priority. In August 2018, roughly three months after the acquisition, Flipkart wanted to expand Supermart to 5-6 cities by the end of the year. That did not materialise thanks to Walmart putting expansion plans on hold to focus on bringing down costs, specifically its cost per shipment, according to two of the Flipkart executives mentioned above.
Cost per shipment is the amount it takes to deliver an order, including warehousing, logistics, manpower and packaging expenses. The cost per shipment around November 2018 was Rs 400 ($5.58), and the aim was to bring it down to Bigbasket’s cost per shipment of Rs 220-230 ($3.07-3.21), the executive mentioned earlier said.
Around that time, Flipkart was in talks with fresh meat and seafood startup Licious for a tie-up, Licious’ chief executive Vivek Gupta confirmed. (Read about Licious and the meat market here.) But after Walmart’s diktat, Flipkart stopped engaging with Licious and focused instead on controlling costs. Licious confirmed that talks with Flipkart ended around the time of the latter’s Big Billion Day sale in 2018.
This focus has paid off. As of June 2019, Flipkart’s cost per shipment—at least in Chennai and Bengaluru—is now brought down to Rs 210 ($2.93), even lower than Bigbasket, according to the Flipkart grocery executive mentioned above. With the model now partially proven, the company intends to expand once more. Flipkart wants to launch in six new large cities before its flagship Big Billion Day sale in 2020 and is also contemplating launching in its first Tier II city.
Earlier this year, Flipkart also showed interest in farm-to-fork supermarket chain Namdhari’s Fresh. A tie-up with Licious and a merger with Namdhari’s would have taken care of fresh produce and meat, filling the gaps in its offerings. (We wrote about Flipkart’s plans for Namdhari’s here.) But the deal is not yet done, said three of the Flipkart executives quoted earlier. Flipkart isn’t just looking to plug holes; it intends to plug them at the right price—another sign of Walmart’s emphasis on cost control.
In the meantime, Flipkart intends to launch fruits and vegetables in the coming 2-3 months across the five cities Supermart is already in, the Flipkart executive mentioned above said.
Flipkart’s F&V category in Hyderabad has a limited selection
The hyperlocal hype
If groceries are a complex category to crack, a hyperlocal supply chain also poses its own challenges. Convenience comes at a cost, as Bigbasket found out during its own tryst with the hyperlocal game.
Delivery in the grocery business can broadly be classified as monthly purchases—like the scheduled deliveries Bigbasket and Supermart offer, which are determined at least a day prior—and unplanned purchases, the spontaneous kind Swiggy and Dunzo cater to. The former makes it easier for companies to control inventory and optimise fleet utilisation. In 2016, Bigbasket started 90-minute deliveries for a delivery fee of Rs 60 ($0.84), higher than its Rs 30 ($0.42) fee for slotted deliveries, but decided to phase out express deliveries altogether from July since the unit economics didn’t work out.
“Hyperlocal has a fundamental design problem. There is an under-utilisation of fleet, compared to a slot-based delivery where the van is going to run on a specific schedule. There is no idle time in slot-based delivery, so unit economics for hyperlocal is always going to be worse than the predicted or scheduled model,” an executive at Bigbasket said. Can the two—scheduled and spontaneous—co-exist, though? It would be tough, says the Bigbasket executive.
The demand for convenience, however, has Bigbasket trying to work out a hybrid system. It wants customers to get their orders on the same day, but at a cost that is sustainable for the company, explains the executive.
Bigbasket is now in talks to combine forces with Dunzo. If this plays out according to plan, Bigbasket will become Dunzo’s grocery backend, while Dunzo would provide a delivery fleet, the executive quoted above said. The executive asked not to be named as the plans are not final yet.
But this is just one way to solve for hyperlocal grocery delivery. Another is through tie-ups with kiranas. Both Flipkart’s pilot and Dunzo’s model currently follow this. The master plan, though, is through ‘dark stores’—4,000-6,000 square feet warehouses close to the city where inventory is stored and can be delivered quickly. This is the model Flipkart is now attempting, the Flipkart executive who has knowledge of the hyperlocal pilot said. The dark stores will eventually be used to store items across all its categories once this is operationalised, he said.
But the problems with the hyperlocal model persist even with dark stores, a former executive with companies like Swiggy and Bigbasket said. The former executive says the average order value for groceries in a slot-based system is between Rs 1,350-1,400 ($18.8-19.5). Hyperlocal delivery, meanwhile, is far lower. The difference in average order value is because hyperlocal caters to need-based items like curd, bread or fruits and vegetables—low-ticket items in an already low-margin game.
For a food delivery platform like Swiggy, the average food order is Rs 200-250 ($2.8-3.5) and can go up to Rs 350 ($4.9) but not more, while in a hyperlocal grocery model, the bill order is even lesser, around Rs 100-150 ($1.4-2.1), the executive added. So even as Flipkart has brought Supermart’s cost per shipment under control, it will have to go back to the drawing board to rationalise costs for a hyperlocal play.
Family ties
The task ahead is massive, but Flipkart has already made considerable strides that will bolster its confidence. Sure, grocery is still a small segment for Flipkart—contributing only 1-2% to its overall revenue of Rs 21,658 crore ($3.02 billion) in 2018, the long term executive at Flipkart said. But it has come a long way.
In 2017, Flipkart’s grocery unit clocked 600-700 orders a day at a GMV (gross merchandise value) of about Rs 1 crore ($139,630) a month. For the last five months, however, it has consistently clocked a monthly GMV of around Rs 40-50 crore ($5.6-7 million), the executive mentioned earlier said. Impressive for Flipkart, but miles behind the likes of Bigbasket and Grofers. Bigbasket is targeting an annual GMV of $1 billion by March 2020, while Grofers is reportedly on track to hit Rs 550 crore ($76.8 million) a month in GMV this year. This hasn’t deterred Flipkart.
While Walmart has been busy with investments for its B2B network, Flipkart has been quietly bolstering its supply chain. There is the potential deal with Namdhari’s Fresh, recent talks to invest $40 million in logistics startup Shadowfax, its investment in another logistics startup, BlackBuck, and locker provider QikPod. And, of course, there’s the expertise of its parent entity to bank on—Walmart’s grocery chain know-how, its cash-and-carry B2B stores, and focus on the kirana network.
“Walmart has expertise in building strong supply chains and developing vendors in the region. They have shown great success in building these models out globally. While Walmart has been extremely successful in the backend, Flipkart is strong at the front-end of the customer experience. Bringing these synergies together will help make them a strong contender in the field,” EY’s Pahwa says. A Flipkart executive says that Walmart could get more actively involved with Flipkart’s grocery ambitions once Supermart hits a certain scale, a worrying prospect for competitors. With hyperlocal delivery the potential rocket fuel for Flipkart’s grocery ambitions, the alignment of Flipkart and Walmart may be closer than their rivals would like to believe.