There have been multiple predictions made by experts regarding the future of businesses in India post the pandemic. While not everyone agrees with each other but they all agree on a particular hypothesis: a black swan event like the COVID-outbreak has the potential to change consumer behavior. Longer the battle with this virus, more the impact on this behavior which consumers take years to form otherwise.
This hypothesis can be validated by looking into past examples of black swan events and how consumers adapted to them post the events. The sharing economy came into limelight post the US financial crisis of 2008. Post the crisis, impacted individuals & small business owners reduced their caution of collaborating with other individuals and looked out for new opportunities to monetize their existing assets. And with access to capital, multiple ventures sprung up led seamless transactions between two relatively unknown entities.
While platforms like Uber & Airbnb set out to monetize tangible assets like car & home, Postmates & Instacart set out to monetize an intangible asset like time by enrolling them as delivery partners. The platforms scaled by attracting audiences with no pre-requisites: standard competency skills or minimum work hours. Feedback loops ensured the quality of the service remained constant & the transacting entities had an incentive to behave well. Similarly, small businesses grew more confident in the value that could be gained out of partnering with platforms like Amazon, Grubhub, and others.
A similar behavior change can be observed in the aftermath of demonetization activity conducted within India in 2016. As 87% of cash was taken out of the system, fin-tech ventures jumped on the opportunity to offer online mechanisms to send & receive payments. New models like UPI ensured that the fin-tech rush stayed alive even after the dust settled down. Merchants who never entertained sale attempts by POS firms would now ensure that they at least offered one e-payment mechanism. UPI ensured that everyone with a bank account & smartphone can now send money seamlessly without any learning involved. The onboarding seemed automatic and payment was reduced to a 3-step method: Enter upi id, amount & pin; with no charges. That’s it!
Both events helped in accommodating changes in human lifestyles and consumers adopting new habits and mental models. And one of the major reasons they stuck to these models was the simplicity of the activity & credibility of the platform.
Post the coronavirus outbreak, the voices suggesting implications on the change in consumer behavior on grocery retail space have been the loudest. Major reasons being the size of the market and sustained demand, the high proportion of unorganized segment & the chance that massive changes in the behavior of the consumers can be brought about with little expenditure.
Hence, it becomes important to understand the business models of the ventures operating in this space. There are broadly 2 models: Offline (Traditional + Modern Trade) & Online (asset-light & asset-heavy)
Kirana stores (the backbone of small business in India) seek to serve demand in the neighborhood by reaching out to customers: households & small restaurants in a specifically defined locality. They are usually based in a high-population density cluster and hence incur high operating costs due to higher rent. However, they also enjoy higher trust & higher customer loyalty: on account of a long time spent working in a given community & personal relationships.
Modern Trade chains like Big Bazaar & Dmart seek to serve the demand of a large set of customers by offering a wide assortment and longer spectrum of prices. They seek to enable higher trust by investing in the brand and ensuring stringent quality standards. Many of these stores are located within malls & are currently facing low to zero footfalls due to partial or full ban on mall operations. Dmart is the only large player that operates the majority of its stores outside of mall locations. It also enjoys an advantage in the lockdown in the form of owning the land for its outlet instead of paying rent (the ability to pay is adversely impacted during lean times)
Both traditional(Kirana) & modern trade face a constraint on the demand-side. They have an upper-cap on the footfall they can serve & shelf-space they can offer at a given time. This ability is measured in the retail square-feet they possess.
A simple grocery retail model followed by BigBasket & Grofers seeks to serve the demand generated out of a channel that has no constraint on the demand-side of the business (retail space is unlimited). Simultaneous orders can be collected at a single instance and the capacity can be scaled up rapidly just by increasing the computing power. With grocery being a high-frequency category, this translates to massive revenue potential. The overheads are comparatively low with only warehouses & distribution centers accounting for expenses. Hence, everyone from Amazon to Flipkart is jumping on the bandwagon to establish a grocery offering.
However, these businesses face a significant expenditure for each additional order that they serve: delivery costs. This expenditure gains more significance due to lower margins in the grocery space (Fresh vegetables & fruits: 5% -10% , FMCG products: 10% - 12%). And this is the reason the online players have struggled to expand operations in new cities and especially the Tier-2 cities.
The delivery costs hamper the unit economics with weak demand and further depend on a host of local factors ranging from consumer demand (different in different geographies), demographic (lifestyle & employment), infrastructure for logistics and strength of loyalty to local retailers. This results not only in costly investments in supply chain capabilities but also slower growth due to the need for customization for each city.
The playbook for every city is different & tuning the supply chain for a particular city is more important than scaling operations. BigBasket dominates in the Southern cities while Grofers dominates in the Nothern part. West has seen strong competition with BigBasket having an edge. Bigbasket promoters with experience in the grocery space, realized this fact early on that it is extremely important to winning a city by figuring out the right supply chain.
All the above facts point out that the grocery business is an asset-heavy model with investments required in sourcing, maintaining inventory & serving demand. The different business models are valued differently primarily on their ability to expand and scale efficiently. The online channel has the highest growth potential due to no constraint on the demand side. But unlike product categories like electronics with a standardized, non-disposable inventory and higher margins, online ventures in the grocery space face almost the opposite scenario.
While variable costs can only be managed by increasing the efficiency of the system, fixed costs can only be covered by scaling the venture to increase sales.
However, the online retail model of BigBasket & Grofers is not the only type of operating model. Nor did they all stumble upon it by chance. In part 2, we will delve into other models and their potential. The models get messier but the unit economics simpler.
