udaan takes on Amazon, Flipkart, JioMart to win Indian e-grocery market

Grocery needs supply chain of fulfillment centres or hubs in an area or region, and several small branches serviced from those centres; it is this challenge udaan is meeting

Logistics capabilities needed for nationwide "quick commerce" are entirely different from traditional e-commerce. E-commerce companies such as Amazon and Flipkart have built a national supply chain, a courier-based supply chain. Demand is generated from all parts of the country, and suppliers are spread across the country. However, grocery requires a distribution-focused supply chain like fulfillment centres or hubs in an area or region, and then several small branches being serviced from those centres. It is this challenge that Bengaluru-based business to business (b2b) e-commerce firm udaan is tackling to win the e-grocery market, according to a report ‘South & SE Asia Tech: How to win the e-grocery market?” by Bernstein, the US-based research powerhouse. The report is based on takeaways from a fireside chat webinar with Vaibhav Gupta, the CEO and co-founder of udaan.

“udaan has 70 fulfillment centres that divide India into different clusters, each covering 250 km of radius and servicing 8-10 distribution branches. udaan also optimizes its product storage based on the nature of the products,” said the Bernstein report. “The fast-moving ones are stores in fast dock zones where they can be easily picked up, and the cost of picking reduces. There are separate storage areas with high strength racks as well for other products.”

Overall, gross margins for udaan increased from 2.5 per cent to 5 per cent last year. At a contribution margin level (post logistics and fulfillment), udaan has achieved profitability in the quarter ending Mar-22, said the report. At an EBITDA level, the aim is to break even by Dec-2024.

udaan offers various product categories on its platform, covering staples, FMCG, pharma, fresh, lifestyle, and electronics.

To help build a viable grocery model, it is essential to have scale in sourcing products. Smaller e-grocery platforms cannot create this, as this is not just about last-mile logistics, but it is about creating adequate demand, and for that, a large cash burn is required. Tapping existing supply at the retail end doesn’t help. The margins are low and not adequate to cover the logistics cost. Hence quick commerce players focus on a small range of products in urban areas – where convenience is offered as a differentiator. While a 1P (first-party relationship) business – with direct sourcing is essential, building it takes several years and requires the ability to fund inventory and wastages.

The Bernstein report said that udaan is tackling these challenges with an existing O2O (online to offline) business with a nationwide reach that is already in place. Over 5000-6,000 tons of products are transported daily across India, giving business scale and positive unit economics. It utilizes the existing retail O2O network as a supply base and aggregates demand on pre-orders from consumers (a community group buy sort of model) – helping to provide visibility to the supply chain and reducing wastages.  

“Logistics network is different from what the B2C players like Amazon have built,” said the Bernstein report. “Grocery requires a distribution-focused supply chain like fulfillment centres in a region and then several small branches being serviced from those centres.”

Right sourcing is also crucial. Unbranded products fulfill over 80 per cent of the grocery demand in India. Hence it is necessary to build a deep sourcing network and source directly from farmers, collections centres, millers, brands, and small manufacturers.

udaan’s management in the report highlighted that sourcing directly from brands has increased tremendously post Covid. Products directly sourced from brands used to constitute 10 per cent of overall FMCG business for udaan, which has grown to 55-60 per cent of FMCG business.

Currently, udaan is working with most of the established brands. Overall, FMCG business has grown 3X from Pre to Post Covid, while branded FMCG business for udaan has 7-8x. The firm also highlighted that on the products which udaan sources directly from brands, it is making a gross profit margin of 6 per cent, while the remaining company is yielding a gross margin of 3-4 per cent.

The report said the management of udaan articulated that its Community Group buying (CGB) model (CBG) covers the entire logistics cost as it benefits from the O2O business. For CGB, the steady stage EBITDA margins at scale are about 5-7 per cent. The O2O business can yield an EBIDTA margin of 4 per cent. An incremental margin of 2-4 per cent can come from value-added services like financial services, advertisements, Private labels, supply chain and financing. The EBITDA margins potential of O2O business is 6-8 per cent, similar to established retailers. Price company, a "community-buying" business, was launched by udaan in December 2021.

It is also essential to lend to retailers from a merchant acquisition and stickiness point of view. udaan disbursed loans of over $1.8 billion in CY20 and CY21, and the default rate is also less, with "90 days past due" at less than 1 per cent. Currently, udaan relies on organized debt/NBFC partners to finance its lending to the small retailers (called Kiranas).

Several models are used to attract consumers to the various platforms. These include everyday low pricing (value offerings) models such as Walmart and D-Mart. There are high-low models where offers are made sporadically (The monthly shopping days for Shopee, Lazada, for example) and Hero SKU models – where some SKUs (stock-keeping units) are always priced at steep discounts. “The focus of udaan is to provide a more consistent value offering – the everyday low pricing model,” said Bernstein.

In Asia, other players such as Sea ltd, Grab, and GoTo and Reliance’s JioMart are also betting big on e-grocery. Bukalapak, an O2O player in Indonesia, has also tapped the market with the launch of "Allo Fresh," collaborating with a supermarket chain. In addition, numerous start-ups have emerged. All of them are in the early stages and experimenting with various models.