How a stubborn Amazon is carving out the grocery market in India and what incumbents are doing

Sunny Sen August 17, 2017

When: March 2015
Where: Amazon India’s office in a north Bengaluru
Who: A team of about a dozen employees
What: A pilot project to deliver groceries to customers
How: A few grocers in selected neighbourhoods are signed up on a platform codenamed KiranaNow. The key metric tracked: delivery within two hours of ordering
Why: Groceries account for nearly three-fifths of India’s overall retail market, making it imperative for Amazon and other ecommerce companies to win in the category

The pilot ran for 11 months and culminated in AmazonNow, formally launched in Bengaluru in February, 2016. Since then Amazon has launched in three more cities — Delhi in October 2016, and then Mumbai and Hyderabad. Company insiders say groceries is one of the four biggest bets Amazon is making in India. (The other three being: building the wallet business, fixing fashion as a category, and doubling down on delivery.)

“We started piloting KiranaNow with an aim to provide maximum convenience to customers when shopping for their everyday needs…,” says Saurabh Srivastava, director of category management (consumables) at Amazon India. “…we expect grocery to be an important strategic category.”

With some $320 billion in sales, grocery makes for 57% of total retail sales in India. That makes India the third largest grocery market globally. Here’s the opportunity: less than 1% of India’s grocery sales happens online.

To be sure, Amazon has had little success in penetrating the groceries and fresh food category anywhere in the world despite being at it for over a decade. There has been speculation that its acquisition of Whole Foods, a US-based brick and mortar grocer, for $13.7 billion this June is a pivot in the business for the Jeff Bezos-helmed company.

No matter how that plays out, what is important is that Amazon India doesn’t have a playbook to copy from the rest of the world to pry open the Indian grocery market. The company knows that and has set aside a war chest: half a billion dollars for its push into food retail, which it has government approval for. A company insider says that the plan is still on the drawing board but some elements of the strategy are already in motion: it will have its own private label in staples and source fruits and vegetables directly from the farmers, for instance.

Then, the big one: its own food supply chain: without doing so, Amazon cannot win in the groceries, a market characterised by leakages, poor control over inventory, and quality issues. That is also the reason why rival Grofers had changed its business model. We will come to that in a bit.

Groceries Now

AmazonNow in its current form is a pure marketplace of grocers — large and small. Grocers sign up on the platform, get orders based on location, and fulfil them. Some of the notable ones are HyperCity owned by Mumbai’s K. Raheja Group, and Kishore Biyani’s Big Bazaar. “AmazonNow (also) has local sellers over various sizes, and the number of sellers vary across postcodes and is continuously evolving. Customers can choose to shop across sellers,” Srivastava says. He does not disclose the exact number of sellers on the platform for competitive reasons.

Conceptualising grocery as a business started sometime by the end of 2012 when Srivastava moved to India from Seattle, where Amazon is headquartered. Amazon launched its operations in 2013, and by then the plans to build the grocery business had started. It took Amazon four years to start selling grocery, formally.

The company has gained some ground — from 2.6% marketshare in March 2016, it has cornered 31.2% marketshare in March 2017, according to data tracker Kalagato. (Some like Grofers dispute Kalagato’s numbers.)

“Amazon is a large player… Some changes are happening. Investors and e-grocers are taking notice, but Amazon takes its own time to analyse and expand in the market,” says a founder of one of the e-grocers that started in 2011, who does not want to be named.

An Amazon insider says that his employer is not rushing into the game for the groceries business. “It is waiting, watching every market carefully, and studying it before taking a plunge: population, the size of the market, customer behaviour, working population, youth population, average monthly consumption, internet users, among other things,” the person says.

But, winning in India will be a tough nut to crack for Amazon. For nearly two decades Indians have ignored buying grocery from supermarkets and hypermarkets. According to consultancy firm Wazir Advisors, only two to three percent of food and grocery retail is organised. Seven to eight percent of the overall $600 billion retail business is organised with metropolises such as Delhi and Bengaluru accounting for as high as 20%.

Amazon has a stated philosophy of “focus on the inputs and the output will take care of itself”. Keeping with this, says a source close to the company, Amazon will focus on three inputs:

  1. Technology: get the delivery routing, which it is already doing; set up the delivery process; and apply machine learning to the process. In the US, it deploys machine intelligence on vegetable and fruit sorting. For example, strawberries are sorted using ML-powered software.
  2. Warehousing: Once it starts food retail and gets its sourcing right as also start private labels, it will stock its own inventory. In doing so, it will combat BigBasket’s inventory-led model and prepare itself for rival Flipkart’s entry into the grocery business. Flipkart has plans to quickly scale the e-grocery business.
  3. Controls: The problem with the grocery marketplace model is that if a product is undelivered or returned, many a times the delivery boy doesn’t return it to the merchant. This happened with PepperTap, with the company losing as much as Rs 1 crore on this account even though its scale of operations was relatively small.

Over time, Amazon has plans to set up the food supply chain. But in the interim, it will set up collection centres and consolidation centres to procure fruits and vegetables and even staples. Eventually, it will reduce its dependency on merchants, says the company executive.

It will contend with competition from other e-grocers in India, who have weathered the storm so far. While in each city where Amazon is present in there is a local e-grocer: Satvacart in Gurgaon, Urdoorstep in Bangalore, and Grocerkart in Hyderabad. Then there are the larger ones: Bengaluru-headquartered BigBasket, the largest e-grocer in the market, which Amazon wanted to acquire, but couldn’t close the deal differences on valuation. There is ZopNow, which is present in 10 cities and commands 2.2% marketshare.

And, there is Grofers, the second largest e-grocer behind BigBasket. The Gurugram company is an interesting case study for its learnings. It recently pivoted into a different model.

Grofers: The silent competitor

Grofers, which has a presence in in 23 Indian cities today, a geographical presence that rivals BigBasket’s.

Grofers started off as a logistics providers to grocers. It was a marketplace, much like AmazonNow. Once the order was placed by a customer, it would pick up goods from a neighbourhood grocer listed on its platform, and deliver it within 90 minutes. It did not hold inventory, did not have warehouses and did not manage the supply chain.

That was not a sustainable business at scale, explains Albinder Dhindsa, Grofers’ CEO and co-founder. From November 2015 to January 2017, Grofers went through a transformation. “It was painful — the company’s character changed — from a tech-focused platform to more about managing the supply chain. It had to become a sourcing organisation,” he says.

What followed was a gradual delisting of all grocers on the platform, letting go 10% of its employee base and offices, and 40% of its customer base. “We wrote a mail to every customer about the transformation, we told our merchants…,” says Dhindsa.

In 2014, when Grofers started, Instacart in the US was one of the hottest e-grocery startups with a marketplace model. That June, it had raised $44 million from Andreessen Horowitz and barely six months later another $220 million from Kleiner Perkins Caufield & Byers valued at $2 billion.

More than two dozen companies in India wanted to be clones of Instacart. Most of them had a slow death, without being able to raise more funds — LocalBanya, Atmydoorstep, and PepperTap were a few of them. Others dabbling in the business too burnt their fingers: Ola stopped delivering grocery and Paytm shut down Zip.

PepperTap’s CEO Navneet Singh had told this writer in April last year that if he continued the business, he would need another $100 million, and that the investment climate had changed. Singh did not respond to FactorDaily’s messages and calls for this story.

Singh ran out of money, but Dhindsa didn’t. He was lucky. Grofers had raised $120 million from SoftBank in November 2015.

But seeing the dark clouds on the horizon, Dhindsa stopped spending. While pivoting, marketing expenditure alone was cut down from three to four crore rupees every month to a few lakhs. According to Kalagato, it lost more than 24 percentage points in marketshare, mostly gained by AmazonNow.

The business stabilised. Grofers claims an average order value of Rs 1,400 and a monthly revenue of Rs 65 crore. Dhindsa says Grofers sells 260,000 items a day.

Grofers is said to have $100 million in the bank today and doesn’t need to raise more.

The company wants to be the Sadar market (the largest wholesale market for household items in Delhi) in online grocery — focusing on affordable and cheaper everyday essentials. “For a family that earns Rs 40,000 to Rs 50,000 a month… they go to areas like Govindpuri, Sadar market, D-Mart, etc. We will bring you the selection of Sadar at one spot,” Dhindsa says.

It has started its own private labels in staples and has partnered with lesser known local brands. For example, there is mustard oil brand called Pansari for Rs 88, which clocks Rs 2-2.5 lakh sales every day. There is Clean, a bathroom cleaner at half the price of market leader Harpic, a brand owned by Reckitt Benckiser. As far as bigger brands are concerned, Grofers procures directly from Patanjali, HUL, and other brands, like BigBasket does.

Grofers stocks only about 6,000 SKUs — one-third of the 18,000 that BigBasket and trailing AmazonNow’s 10,000 — but Dhindsa is fine with it. Besides the right pricing, he is clear that the customer he wants to target is the one who’s not in a hurry. While AmazonNow promises delivery in two hours and BigBasket offers to deliver in 90 minutes at an additional charge, Grofers delivers in a day or two. “The price you pay for (affordable products) is that we wouldn’t deliver the same day and we don’t have a huge selection,” says Dhindsa.

E-commerce vs e-grocery: nuances galore

“E-grocery is more of a grocery business than a technology business… Earlier players came and said that they will develop an app and deliver the products,” says K Ganesh, promoter of BigBasket, and founder of Growth Story.

That is one of the problems that Amazon will face. As a marketplace, Dhindsa says that Grofers’ fill rate never crossed 70%, which means it could provide customers only seven out of 10 products ordered. “Now we have a fill rate of 99.4%,” he says.

That is very similar to BigBasket’s. Online grocery requires the platform to do merchandising and sourcing from the vendors and the farmers, which is what BigBasket did from its second year.

“If you are a marketplace, your fill rates become dependent on the seller. Higher fill rates are extremely important,” says Sushant Junnarkar, founder of Atmydoorsteps, an e-grocer that shut shop in 2014 because of lack of funding.

To Amazon’s advantage, it has deep pockets, understanding of e-commerce, and vision of scale. In an interview to Financial Times, Srivastava, the Amazon India director for consumables, said that Amazon is “ready to spend to break the market… it is a question of getting scale.”

That can be scary for Amazon’s competitors. “Investors are scared that Amazon can start a price war, but grocery is not a money game,” says Rahul Hari, CEO and founder of Gurgaon-based Satvacart. “In the US, Amazon has been operating since 2006, but still only 2% of the grocery business has gone online.”

Hari says that in 2015, everyone gave Grofers’ example of the marketplace model and how they expanded quickly. “Rapid expansion is when the complexities come in,” he says.

Add to that, grocery is a low margin business, where you are lucky to net four to seven per cent.

“If you are buying it from someone else (offline grocer), what margin will you get,” asks Junnarkar. At times after the grocer keeps his profit, the e-grocer is left with 1% to 2%, which is not sustainable in the long run.

That is where an inventory-led and private label model becomes important in e-grocery, unlike in regular e-commerce. “It cannot be a horizontal tag in e-commerce. It’s not like shoes or fashion or furniture,” says Ganesh of BigBasket.

He further adds that if Amazon or any other e-commerce player has to succeed, it will have to win in every city. “Unlike mobile phones, you cannot deliver fruits and vegetables from one city to another… Despite the size of the player, the battle is the same,” Ganesh says.

For BigBasket, 40% of its business comes from private labels. Private labels also play a role in keeping a higher fill rate, apart from improving the margins. “Unless you have private labels where the margins are 20% to 30%, the margins in e-grocery is very low,” Ganesh adds.

In pic: Serial entrepreneur K Ganesh. “E-grocery is more a grocery business than a technology business.” Photo: Rajesh Subramanian| FactorDaily

BigBasket has taken up entire farms and mills to support its private label business. According to sources, the company already does Rs 250 crore of revenue every month.

Perhaps that is the reason why Amazon wanted to acquire BigBasket — high revenue, 40% business from private labels, and presence in 23 cities. The company is said to be in talks with Paytm Mall for a probable acquisition, FactorDaily had reported earlier, with an initial funding of $200 million.

“We won’t comment on acquisitions… We are out there in the market to raise money,” says Ganesh, keeping his cards close to his chest.
That is also an opportunity for Grofers, Dhindsa says. “We want to stay independent, but we are open for investments. If BigBasket is out in the market and still not been able to raise, we will go out and see what we can do. BigBasket is building an online Spencer’s or Nature’s Basket, we are building the online D-Mart. Both are very different games,” he says.

Slow and steady: Wins or loses the race?

Srivastava is not bothered about competition. “We are a customer obsessed company, not competition focused and hence would not like to comment on the same. We believe growth is at an inflexion point and there is a tremendous opportunity,” he says.

One of his obsessions is to deliver within two hours. All AmazonNow deliveries are done using Amazon Logistics. There is a delivery agent app, which allows the delivery boys to get the order notification, pick up order from sellers and deliver it.

The app has built-in custom tracking and dispatch engine that keeps track of seller’s order readiness, delivery agent location, delivery vehicle type and carrying capacity. Based on these parameters it allocates the order to the nearest delivery agent and provides it with a route map — which order to be delivered first and which one to be delivered last to ensure that the delivery happens within two hours.

The app also allows third party logistics vendors to sign-up and start delivering on behalf of Amazon. For those who want to earn an extra buck, the app allows pre-screened individuals to sign-up as part time delivery agent.

“We are very excited with the way the AmazonNow is evolving and scaling. AmazonNow will continue to be one of our key areas of focus as well as investments in the coming years,” Srivastava says.

Amazon also wants to provide its customers with some personalisation. Customers can shop from past purchases, filtering quickly and easily for items they have bought recently — copying a feature that customers find useful on BigBasket.

But all this would not matter if Amazon is not able to fix its fill rates, which is lower than BigBasket and Grofers. According to sources, it is anywhere between 70% to 85%, depending on which city the customer is.

When it moves to a hybrid inventory-marketplace model, it will have a big advantage: its 42 warehouses across the country and large ones in the cities where it has grocery businesses. Warehouses would allow quicker delivery and more control on the supply chain. To be sure, BigBasket, Grofers, Satvakart and other smaller e-grocers also have warehouses but the Amazon ones dwarf them in comparison.

One thing’s for sure — India’s e-grocery market is far from settling down. “We believe there is room for multiple formats, players and most importantly, for innovation. For us it’s still ‘Day 1’ in India,” says Srivastava.


Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.