In response to my last post on food delivery apps, I got comments from people who drew parallels to online grocery shopping and rightly so. At a high level, they both have very similar business models, and yet very different. First some background.

Online grocery market in India is estimated to be $5 billion by 2020. The demographics that drive online food delivery drive this too (changing demographics, DINK families, and the rising middle class with surplus disposable incomes). The product is mostly consumables. So, it has a high customer return rate, and faces relatively low impact during recession. Online grocery sales as percentage of overall sales is currently around 1–2% compared to ~7% of overall sales for other categories of online sales. Naturally a lot of players are targeting this segment. Big basket, LocalBanya, ZopNow to name a few. Not to forgetAmazonFresh.

From a customer perspective, the value proposition is again convenience. Most players provide the option of delivery at specific time slots, saves the customer the trouble of having to carry the items, saves time spent in supermarket checkout lines etc. Revenue can be generated via charging the customer a delivery fee or by commission or referral fee (in case it is a tie-up with local kirana stores) or markup (if owning inventory). It should be noted here that groceries are commodities with very low margins. Margins are as low as 1.1% for offline sales at supermarkets and can range from 6–8% in other formats.

So the economics and challenges are not very different from what I highlighted in my last post. Just replace hotels with kirana stores (or the online-grocer, if they hold inventory) and you will realize that extracting a premium price from either side of the market is going to be tough.

The other challenge is that the point of differentiation compared to general category e-tailers is fresh produce, and consumers are today not very keen on buying fresh produce without seeing it first. So the first time, you deliver a rotten or sub-par quality vegetable, the customer is going to be put off. Even now ~30% of the sales come from non-food items where the competition is with general category e-tailers

Then there is the challenge of delivering it home without losing money on the order due to spoilage, returns etc.

On the positive side, you don’t have to promise delivery in 30 mins and so you can better manage the logistics to keep costs in check. There is also better scope of segmenting the market and targeting segments that see value in the convenience. Senior citizens, differently abled, NRIs providing maintenance for their families back home and so on.

What worries me though is that most of the current players seem to be focusing their advertisements on lower prices instead of convenience. The trouble with doing this is that, the growth that you get is from price sensitive customers and for a low margin business, where you are selling convenience, you want customers who are not price sensitive. This is one of the reasons cited for the failure of Webvan (this, growing too fast, and over investing capital in setting up infrastructure) I agree that initially you need to do this, to hit critical mass to realize economies of scale before your competitors do and so you are willing to get all types of customers, but then it puts you in a spot where either you continue to discount and lose money or generate low margins forever or lose your customers the minute you start charging for convenience or stop deep discounting. The customers flock to the next new start-up providing you the lowest prices.

There are multiple models that can be employed by an online grocer depending on whether they own inventory, allow in-store pickups etc. A good classification is given in this paper by AT Kearney. And there are a few examples of profitable players in this space whose success can be emulated by Indian players (of course after customizing for India). As with most other start-ups, there are already a few US players who having learnt from the failure of Webvan, are doing things differently. Below are a few things I find interesting about them


  1. Didn’t build its infrastructure from scratch but partnered with grocery stores to leverage their infrastructure and focus on delivery and customer service
  2. Mark up on prices of items so that real prices are not visible. So target audience is price insensitive customers not someone who remembers, and tracks prices of hundreds of grocery items
  3. Nominal delivery fee of $3.99 plus subscription of $99 / year for free delivery (similar to Amazon Prime)

With these it is poised to generate margins and not lose money on orders.

Winder Farms

  1. Focuses only on dairy products and fresh produce sourced from local bakeries etc.
  2. Requires users to set up repeat orders which can be customized only weekly and there is an early cancellation fee
  3. All deliveries are once a week on a pre-set delivery day
  4. They provide the customer with a returnable ice-cooler so that the customer need not be home at the time of delivery. Though the customer have to pay for the ice-cooler if it is lost

It is interesting because, groceries unlike take-out food need not be tied to same day delivery. By doing this they are able to efficiently manage the logistics.

You may also want to look at FreshDirect and Ocado.

Do you know of any other interesting players in this space who are doing things differently and have targeted profits from the start? I would love to hear about them.