I recently read an article, which said, “Online grocery stores require large investments, deeper technology and complex supply chain. Hence it does not pose a wide start-up opportunity.” Since, I have had the opportunity of working very closely with some companies in this space, it set me thinking. To start with I don’t agree that this business does not pose a wide start-up opportunity. Same as in any emerging business, there are various models at work, which will get fine-tuned as time goes. But at the heart of it is achieving a change in consumer behaviour which will contribute to scale.
Yes, you need to have a strong technology backbone in order to process ordering, picking, packing & delivering, but that is not insurmountable. In many ways, technology has today become commoditized – in the sense that there are plenty of solutions that you can buy and tweak as per your requirements, or if you know a good techie or two, you can get it done on your own. And, if you are far-sighted enough you would have spent upfront on a technology that is scalable and hence requires minimal repeat spends as you grow.
At the heart of any business working or growing profitably is scale. Online grocery is no exception. But executing scale, while holding inventory, can be a stress on capital expenses. Imagine having to keep on adding warehouses at each location. The asset light model employs inventory management that procures stuff only when they have been ordered. In other words: Just-In-Time. Stock a tiny fraction of the fastest moving SKUs and pick from large wholesalers only what your current lot of orders requires. The same goes for perishables. You can instantly cut out not just warehouse cost, but also cost of large scale industrial-level air conditioning.
Supply chain is also something that is slightly more complicated in the case of an asset light model, compared to an inventory-based or offline model. But, there are ways to make it work right and it all boils down to scale. So even though you might not want to take the capital costs of the delivery infrastructure on your own books, you can sweat each inbound & outbound vehicle that much more as your scale grows. In fact, a mobile hub and spoke model is something that is being experimented with. You don’t really need to have tie-ups with offline store to be efficient. Yes, some big players are entering the market with that model, but they will have to work very hard to maintain consistent service levels across the entire network of offline stores.
While one would have to agree that most of the online grocery businesses have been city specific, these are only early days. I have no doubt that templates being set in one city are highly replicable in the next. Also, apart from the traditional arguments of overcoming inconvenience, a few of the biggest advantages of online grocery retailing are (1) Unlimited shelf space, leading to thousands of SKUs being available at no large real estate cost; (2) Ability to dynamically upsell and/or generate offers based on user profiles & past purchases; and (3) Ability to offer deliveries at any time of the day, as per the consumers’ preference (with so many double income households, late-night deliveries are now very prevalent). Yes, you have to be patient with any business in the beginning. This is a business which is disrupting consumer behaviour. In its current avatar, a lot of regular purchasers will obviously be the more savvy lot. But we’ve seen from other ecommerce models, that it didn’t take long for others to catch on.
Changing consumer behaviour was never easy, but it has always yielded good returns. Therefore, upfront costs on marketing & brand building are perhaps going to be much higher in the case of these organizations. But behaviour once changed, is tough to go back on. And when you combine that with a repeat-purchase habit like grocery shopping, it would only yield ever increasing volumes. Owning the consumer also leads to many other related revenue streams.
It’s still early days for the space. As in every emerging sector, not everyone might crack the model. But those who do would not only have made a lot of money for their investors, they would have created a completely new market. And that, to me, makes a suitable case for a start-up opportunity.