The fight for the grocery basket

The battle between Amazon and Flipkart for India's groceries market is going to be about much more than low prices

After burning billions of dollars to offer discounts on products to get more people to shop online, India’s e-commerce heavyweights are turning their attention to get the base of 100-odd million shoppers to buy more regularly from them.

Both Flipkart and Amazon boast of reaching new customers in ever smaller towns, but their efforts have so far only given people a taste of online shopping. The uphill battle of getting people to shop with them multiple times a year starts now, and everyone’s bet is on groceries.

“Retention has been low, but we have made it a big agenda for this year. Once categories such as groceries and low-cost fashion are able to establish themselves with a proven business model, retention will increase,” said Kalyan Krishnamurthy, CEO of Flipkart, in an interview with Business Standard last month.

While Flipkart is working on its model for grocery delivery, rival Amazon has taken the first steps with the launch of two products —Now and Pantry. Through Amazon Now, the company offers grocery deliveries within two hours, while Pantry is for customers making larger orders, even targeting customers such as small restaurants.

Amazon has partnered with leading offline large format retailers such as Big Bazaar, Star, Spar and More in order to power its grocery deliveries.

Earlier this year, Amazon had said that its grocery category had grown by over two and a half times, thanks to repeat orders and free shipping offered to its Prime customers. Flipkart’s Krishnamurthy, on the other hand, believes that offering free shipping isn’t the answer to getting customers to shop repeatedly online.

The unlikely price war

Unlike smartphones, which are easy to ship and have large sticker prices, groceries will be a whole new ballgame requiring massive investments in logistics. Moreover, it will be hard for Flipkart and Amazon to play the price game since fast-moving consumer goods (FMCG) companies will likely protect small kirana stores that drive a large portion of their sales.

“Four to five years ago, Marico had pulled its products from Big Bazaar’s shelves because 90 per cent of their sales were coming from kirana stores and they didn’t want anyone selling products at a discount,” said Harminder Sahni, founder of retail advisory firm Wazir Advisors. “It is going to be extremely hard to start a price war in this segment.”

Even though retail is highly fragmented in India, the massive FMCG market is controlled largely by brands, which have deep pockets and an even deeper reach into India’s hinterland.

While a way around this would be to have private label brands for FMCG products, given the extensive reach of existing brands and the loyalty they demand, this would relegate e-commerce players to only a small portion of the market. BigBasket, India’s leading online grocer, faced the same issue, and while it has grown massively, it still is a speck in India’s vast market.

Convenience… Really?

If price is a tough nut to crack for e-commerce marketplaces, offering improved convenience over offline shopping will be even harder. India’s fragmented offline market means people have access to a kirana store every few hundred metres, with these stores themselves offering home delivery on bulk purchases.

For e-commerce players to win in a market like this, they’d have to offer unconditional deliveries on even small FMCG purchases, something which will make them bleed billions. “Imagine offering free and quick delivery on a tube of Colgate toothpaste. That is more convenient than what’s available today, but is it worth it?” said an industry watcher who did not want to be named.

Sahni points out that another type of e-commerce buyer in India exists, one who doesn’t have access to products nearby. However, given the extensive reach of FMCG companies in India, if they aren’t able to reach these customers, it’s going to be harder for e-commerce marketplaces to reach them. 

Both Flipkart and Amazon might have the appetite to burn billions and capture the market. However, the question to ask is whether investing all that money into groceries is worth it. In short yes, as it could help these companies build a base of customers that buy only from them, including high-value and other profitable products.

Hope in groceries

There is definitely hope. Given the complexity of logistics involved in grocery deliveries, technology is the key to creating an efficient model. E-commerce marketplaces could excel here, with their deep pockets and bloated technology teams, apart from the experience that players such as Amazon have in this space gained from overseas.

“Execution is going to be key here. They are going to have to build logistics networks that are far more robust than what they have right now, which is a big task. They will invest billions here and this will help them in other categories as well, so it makes some sense,” added the person who did not want to be named.

However, at a time when Flipkart and Amazon are trying to build loyalty among customers, any hiccups with their grocery operations could lead to disaster. Phones, apparel, furniture and electronics aren’t perishable, making them rather easy to ship to customers. With groceries, however, delivery adds another layer of complexity — shipping expired or old products could result in loss of customers.

The Next Frontier

• Flipkart launched a grocery delivery app called Nearby in October 2015, but shut it within six months
• Amazon began piloting its two-hour grocery delivery service, Now, in Bengaluru in Feb 2016
• Amazon launched Pantry, its bulk grocery delivery service, in July 2016 in Hyderabad
• In April, Flipkart CEO Kalyan Krishnamurthy said Flipkart would get into groceries once again
• Amazon was in talks to buy online grocer BigBasket, but talks seem to have fallen through